The shares of Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US), currently trading at 77p, have risen 78% over the last five years. Lloyds is not only the top performer of the FTSE 100’s five banks, but also has thrashed the 58% gain of the index.
However, Lloyds could deliver an even bigger rise over the next five years, because the shares have the potential to soar 95%.
Here’s how
Lloyds has made larger strides towards recovery since the 2008/9 financial crisis than its more heavily bailed-out rival Royal Bank of Scotland.
Sure, Lloyds is still some way from being the finished article — legacy issues have a bit to run, the government still owns 25% of the shares, and the bank has yet to restart paying dividends to shareholders — but the day when Lloyds walks out of rehab is drawing ever nearer.
Earlier this month, the bank reported an underlying profit of £1.8bn and a statutory bottom-line profit of £1.2bn for the first quarter of this year, driven by a healthy improvement in the net interest margin. Other signs of increasing fitness included a more muscular capital buffer and a much-reduced impairment charge.
City analysts are forecasting positive earnings per share (EPS) for the full year, with the consensus being for 7.2p. The analysts are expecting EPS to continue growing nicely thereafter — through to 9.35p by the year ending December 2018.
Long before then — in fact, by next year — the government should have returned its stake in Lloyds to private investors, and the bank should have resumed paying a dividend.
So, by 2018 we’d be looking at a fully rehabilitated Black Horse, with earnings cantering steadily ahead, if the analysts’ forecasts are accurate. Such a bank might be expected to rate in line with the FTSE 100’s long-term average historic P/E of 16. If so, Lloyds’ shares would be trading at around 150p — a 95% gain on today’s price.
Analysts expect Lloyds’ to announce a modest final dividend in its annual results next February, and the income then to grow at a fair clip. The consensus is for a total dividend payout of about 23p over the five-year period. Put another way, a £1,000 investment in Lloyds today would deliver £299 in dividends alone.