Since the Conservative victory in the General Election, shares in Lloyds (LSE: LLOY) (NYSE: LYG.US) have risen by over 5%, as investors have become more upbeat about the bank’s long term future. For example, the process of returning Lloyds to full plc status (i.e. selling off the government’s stake) appears to be a relatively straightforward one, with demand from both institutional and private investors seemingly buoyant and sufficient enough to mean that further share sales should pass without major drama.
A Changing Landscape
Of course, Lloyds and its banking peers have had it tough in recent years. A key reason for this is the vast regulatory fines that have caused a significant proportion of bank profits to be paid to regulators across the globe. Furthermore, provisions for the alleged mis-sale of payment protection insurance (PPI) have meant that profits have been hit even harder, with the combined effect of the two on investor sentiment being significantly negative.
However, looking ahead, things are set to change on this front. For example, Lloyds reported no new provisions for PPI mis-selling in its most recent quarterly results and the likelihood of the current level of fines continuing over the medium to long term appears to be rather slim. After all, Lloyds and the wider banking sector are generally paying for past mistakes and challenges, rather than actions that have occurred under present management.
Income Prospects
As well as a lower interest rate contributing to a fall in impairments in recent months (they were down by 60% in Lloyds’ most recent quarter), it is causing investor sentiment towards high dividend stocks to increase. As such, the dividend prospects for Lloyds are likely to act as a major catalyst on its share price over the medium to long term, with dividends per share set to rise by 5.6 times between 2014 and 2016. As such, Lloyds could be yielding as much as 4.8% in 2016 if its share price remains at the current level of 87p, which would undoubtedly improve investor sentiment even further and could equate to substantial capital gains for investors in the bank.
Looking Ahead
While the UK banking sector is not viewed by many investors as a great place to deploy their capital, its long term potential is significant. That’s because the UK economy is moving from strength to strength and the Bank of England is committed to a low interest rate for as long as it takes to return the economy to a more stable footing. As such, the operating conditions for banks such as Lloyds are likely to remain very favourable for a number of years.
Furthermore, Lloyds continues to offer staggeringly good value for money when compared to the wider index. For example, the FTSE 100 has a price to earnings (P/E) ratio of around 16, while Lloyds has a P/E ratio of just 10.7. As such, there is tremendous scope for an upward rerating, with reduced fines and increasing dividends being the likely catalysts to push Lloyds’ share price much higher. As such, it remains one of the most enticing stocks to buy on the FTSE 100.
