See the mighty fallen. With Lloyds Banking Group (LSE: LLOY) now trading at just 75p a share, it is quite astonishing to remember just how much it cost in the past. Back in 1999, you would have paid a mind-boggling 976p — that’s 13 times today’s share price.
We all know what did most of the damage: the financial crisis would have destroyed Lloyds if the taxpayer hadn’t stepped in. But the decline began before then. In the months before the credit crunch, Lloyd was trading at around 591p, well below its pre-Millennium highs.
Higher Than The Sun
When Lloyds hit its all-time high it was overvalued by traditional metrics, trading at around 21 times earnings, but it wasn’t that overvalued. As my Foolish colleague Rupert Hargreaves has pointed out, in 1999 Lloyds posted a profit attributable to shareholders of £2.5 billion and had 5.5 billion shares in issue, which equalled earnings per share of 46.2p.
Today, it has more than 71 billion shares in issue, so would have to produce a profit of nearly £33 billion to match that earlier EPS figure. With underlying first-half profits of £4.38 billion, Lloyds clearly has to go a long way to recapture its former glories.
Float On
Lately it has been stuck in first gear. Over the last two years, the Lloyds share price has hardly budged at all. A combination of the government selling off its stake, continuing mis-selling provisions, and wider economic uncertainty have plugged its comeback for now. One number does look more intriguing as a result: Lloyds trades at just nine times earnings today, and can hardly be described as overvalued.
Its share price may prove sticky between now and the retail flotation next Spring, when private investors will get an upfront incentive to buy Lloyds. But once government ownership is concluded and open road will lie ahead of it, and it might be time to Lloyds to kick on again.
British Pluck
One big attraction is that Lloyds has cut back on its riskier global operations to focus primarily on the UK retail market. The result should be a safer, more transparent business. With the UK booming, Lloyds has certainly picked the right market, but we won’t always be outgrowing the G7. Future revenues will depend on swings in the British business cycle.
EPS growth may be a steady 5% this year but it is forecast to fall 6% in 2016, suggesting further progress will be bumpy. That shouldn’t deter long-term investors who favour dividends over growth. Lloyds yields just 1% today, but payouts should rapidly accelerate from here, and it should top 5% or 6% by 2016.
Given how far Lloyds has to travel to recapture its all-time high, I suggest investors set themselves more modest investment targets. Frankly, Lloyds will probably *never* get there again, in any foreseeable timeframe. But at today’s tempting valuation it should prove a highly rewarding investment anyway.
