2016 is expected to be the year when Lloyds (LSE: LLOY) returns to being a true plc. In other words, the government’s stake in the bank is due to be sold off and it will no longer be a part-nationalised business. While this was due to take place earlier in the year, the government decided to postpone the share sale due to exceptionally volatile stock market conditions.
Clearly, the sale of the government’s stake is good news for the bank’s investors. That’s because it shows that Lloyds is well on the way to full financial health and no longer needs a helping hand from the government. This could cause investor sentiment towards Lloyds to improve – especially since the share sale appears to be somewhat hanging over the bank.
In fact, with the share sale set to include a discount to the market price and the potential for a bonus share for every one held for more than a year, investor demand for Lloyds may have waned somewhat in recent months as many investors await the government’s sale. Therefore, with renewed demand for what’s a high quality and very efficient bank, Lloyds’ share price could reverse the 4% fall it has recorded since the turn of the year.
Rising dividends
A second potential game changer for Lloyds is its rising dividends. Dividends per share are forecast to increase from 2.25p in 2015 to 5.1p in 2017. This is an increase of 127% in just two years and puts Lloyds on a forward yield of 7.3%. This is well in excess of what’s already a very generous FTSE 100 yield of 4% and highlights just how appealing Lloyds is set to become as an income play over the next couple of years.
This has the potential to rapidly improve investor sentiment towards Lloyds and this could cause a rise in the bank’s share price. Clearly, dividend forecasts may not be met, but with Lloyds having such a high yield there appears to be a wide margin of safety, which indicates there’s a good chance that the bank’s share price will outperform the wider index over the medium term.
Interest rate rises
As well as the sale of the government’s stake and an increasing dividend, another potential game changer for Lloyds is rising UK interest rates. Although the exact timing of rate rises is unknown, it seems likely that they’ll occur over the medium term. Similarly, the pace of their rise is also a known unknown, but it seems unlikely that the Bank of England will become relatively hawkish in the coming years for fears of choking off the UK’s economic recovery.
While rising interest rates could cause a reduction in demand for borrowing and an increase in the default rate for existing borrowers, Lloyds’ current valuation appears to fully take into account the potential for challenging trading conditions. It trades on a price-to-earnings (P/E) ratio of just 9.2, which indicates that it has a sufficiently wide margin of safety to merit investment right now.
