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 Standard Chartered 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 Standard Chartered 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.

Of course, there are plenty of other passive income opportunities to explore. And these may be even more lucrative:

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

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.

We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

More on Investing Articles

Investing Articles

Here’s why Tesla stock just rocketed 22.7%! Is it time to buy?

This writer wonders whether the news that sent Tesla stock soaring yesterday is a true gamechanger for the electric vehicle…

Read more »

Investing Articles

2 quality UK stocks to consider buying as share prices rally

With UK stocks moving higher, it might look as though investors with cash on hand have missed their chance. But…

Read more »

Investing Articles

How much £10,000 invested in Lloyds shares is forecast to be worth in 12 months

Harvey Jones is looking past today's stock market volatility to see where Lloyds shares may stand in a year's time.…

Read more »

Investing Articles

How Warren Buffett stays ahead of the stock market

When share prices fall, everyone suddenly wants to be like Warren Buffett. But what’s the secret to the Berkshire Hathaway…

Read more »

Investing Articles

Cheap UK dividend shares to consider buying right now

We're only just past the first quarter of 2025, but it already looks like the year could be another good…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

What the heck is going on with the Barclays share price now?

The Barclays share price surged 25% as the market open on 10 April. Once again, the volatility’s been driven by…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

What the devil’s going on with the HSBC share price?

The HSBC share price has actually been less volatile than some of its peers, despite its Chinese operations suggesting it’s…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

Are Tesco shares a screaming buy after sinking to 9-month lows?

Tesco shares continue to experience price weakness as signs of mounting competition grow. But is it now too cheap to…

Read more »