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Why Lloyds Banking Group PLC Is Standing Tall Again

Lloyds (LSE: LLOY) (NYSE: LYG.US) is nearly off the treatment table. After yesterday’s announcement that the Treasury will sell a further 7.5% tranche of its shares, the bank is that much closer to returning to full private ownership.

Lloyds has trimmed its assets, scaled back its international operations and set out its stall as a UK-focused retail and business lender. Evidently, the strategy is working — the bank doubled underlying profits this year, and the share price has surged 54% in the last 12 months.

That’s quite the turnaround. However, the share price is no longer what you’d call beaten down; Lloyds certainly isn’t the risky contrarian investment it once was. You could’ve bought the shares for as little as 50p last year, and in 2012, if you’d been exceedingly brave, there were buying opportunities below 30p. 

Ahead of a retail offering — potentially, the government will sell more of its stake around September — the question becomes: does Lloyds have any upside for new investors?

Confidence restored

LLOYCertainly, you can now invest in Lloyds with greater confidence than at any point since the credit crunch. 

Earlier this year Lloyds was hit with an extra £1.8bn provision for mis-selling PPI, yet the worst of the scandal appears to be over, and the shares are far less likely to tank in concert with new bombshell revelations. Of course, this is the banking industry, so you never really know, but personally I feel the chief executive’s belief that Lloyds is now a “normal bank” is more than just a PR soundbite. The sailing might not be entirely smooth, but a life jacket is probably more precautionary than essential.

Lloyds shouldn’t capsize, and the balance sheet backs that up. The bank improved its tier 1 capital ratio — a key measure of financial strength — to 10.3% in 2013, greater than the 10% ratio generally expected by investors.

Dividend forecasts

The remaining obstacle on Lloyds’ path to normality is the restoration of dividend payments. The bank won’t apply to the regulator until sometime after the summer, and payments will start out small.

While you’re unlikely to see spectacular share price gains in the future — the likelihood of a dividend in 2014 is already factored into the share price — Lloyds could end up a decent income stock, if analysts forecasts prove correct.

If we stick to guidance that Lloyds will pay out 50% in earnings to shareholders — that’s a dividend equivalent to 4p per share in 2015 — then you could secure a 5.3% yield on today’s share price.

Shop around first

There are other options in the banking industry, and it's only sensible to weigh up your options before deciding what to buy.

"How does Lloyds stack up against RBS?" "Is Lloyds a better income bet than Barclays?" 

For a clearer picture, you'd be well served to check out "The Fool's Guide To Investing In Banks".

This is a free special report from the Motley Fool's top banking analyst, and there's no further obligation.

Simply click here for your FREE copy.

Mark does not own shares in any company mentioned.