Is There A 60% Upside For Lloyds Banking Group PLC In 2016?

How high can Lloyds Banking Group PLC (LON: LLOY) shares climb in 2016?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The latest global turmoil has seen Chinese share trading halted for the second time in a week with worldwide markets falling too, coupled with oil hitting ever-lower prices and Middle East tensions escalating. That’s been hitting our FTSE 100 banks too, but I reckon it’s throwing up even better bargains.

After a steady recovery from the depths of the crisis, Lloyds Banking Group (LSE: LLOY) shares have been dipping again of late and have lost 20% since their May 2015 peak, trading at 69p as I write. That puts it on a forward P/E multiple based on 2016 forecasts of just 9.2, when the long-term FTSE average stands at around 14.

I said recently that there could be a substantial upside for Barclays in 2016 – the turmoil has now pushed Barclays shares down to a forward P/E of only 8.2. And I reckon the same is true of Lloyds, especially as Lloyds is expected to pay out a significantly higher dividend yield than Barclays, of 5.1% against 3.6%.

Should you invest £1,000 in Heiq Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Heiq Plc made the list?

See the 6 stocks

Oversold?

Although there’s probably some natural cyclical contribution to the current downturn, I think the fall is overdone. And if we assume a long-term P/E for Lloyds of close to the market average, we’d be looking at a potential price gain of around 50% needed for a recovery to those levels. But on top of that, the high and progressive dividends (the FTSE average is only a little over 3%) suggest a higher rating would be justified. And I don’t think 60% is in any way an unreasonable target. That would imply a price of around 110p.

How reliable is that dividend going to be? At the first-half stage this year, chief executive António Horta-Osório said: “Our aim is to have a dividend policy that is both progressive and sustainable.” He added: “We expect ordinary dividends to increase over the medium term with a dividend payout ratio of at least 50 per cent of sustainable earnings.” That would imply a yield of 5.6% for 2016 would be closer to the firm’s medium-term targets, so there’s still room for a small further rise even without future earnings growth. With growth, I could see an effective yield at today’s price of 6% to 7% in two or three years.

What stress?

In the most recent Bank of England stress tests, reported on 1 December, Lloyds “comfortably” exceeded the required thresholds. Lloyds’ reported CET1 ratio of 12.8% and leverage ratio of 4.9% dropped only to 9.5% and 3.9%, respectively, in a modelled world of 9.2% unemployment and falls of 20% and 30% in housing and commercial property prices, respectively. There’d be no cap-in-hand begging at the government’s door in such a scenario next time.

One downside of Lloyds though is the government’s ongoing sell-off of its stake, which has been satisfying much of the institutional demand for shares and helping to keep the price down. With a target of disposing of the remaining stake of less than 11% by mid-2016, the overhang effect should continue for some more months, though as long-term investors we might have a little while yet to buy-up shares while they’re cheap.

Long-term cash

My suggested price targets here are really just speculation, of course, and the short term isn’t what counts. Over the long term, I see Lloyds as a strong income stock, with attractive growth prospects thrown in – and yes, I really can see it as one of 2016’s FTSE 100 winners.

Should you buy Heiq Plc now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alan Oscroft owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Barclays. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Older couple walking in park
Investing Articles

Could £300 a month invested in US and UK shares reach a million by retirement?

Could an investor retire with a million pounds just by dedicating £300 a month to US and UK shares? Mark…

Read more »

Young Caucasian man making doubtful face at camera
Investing Articles

Is £800 enough to start an ISA?

Is it worth bothering with an ISA with less than £1,000 to spare? This writer believes it may be --…

Read more »

Investing Articles

3 reasons Tesla stock may be a long-term bargain

This writer is keen to buy Tesla stock at the right price. He doesn't think it's there yet -- but…

Read more »

Investing Articles

Nvidia stock is a lot cheaper than before – or is it?

Nvidia stock has been caught in the whirlwind of market volatility. This writer has been waiting to buy, so might…

Read more »

Top Stocks

3 FTSE stocks Fools are eyeing up for choppy markets

A selection of companies listed on the UK stock market on the watchlists of four Foolish investors.

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

A £10,000 investment in Rolls-Royce shares last week is now worth this…

Harvey Jones says Rolls-Royce shares couldn't escape the volatility of recent weeks, but wonders if the recent dip is a…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

Prediction: in 2 years these S&P 500 stocks will be much higher than they are today

These two S&P 500 stocks have been beaten down in recent weeks. But Edward Sheldon expects them to move much…

Read more »

Investing Articles

10% yields! Why a volatile stock market is great news for passive income investors

The recent stock market volatility has given passive income investors the chance to earn double-digit returns. But they still need…

Read more »