After posting gains of 61% in 2013, Lloyds (LSE: LLOY) (NYSE: LYG.US) appeared to be all set to deliver more capital gains for shareholders in 2014. However, this year hasn’t been quite so positive, with shares in Lloyds being down over 5% during the course of 2014, while the FTSE 100 is flat for the year. However, things could be about to get a whole lot better for investors in Lloyds. Here’s why.
Strong First-Half Results
First-half results from Lloyds were impressive and beat market forecasts, with the bank delivering profits of £3.8 billion versus the £3.6 billion that were expected. Furthermore, Lloyds said that it expects income to be higher in the second half of the year than in the first half, which bodes well for investors. In addition, impairments for bad loans decreased by 58% as Lloyds (and the wider sector) continue to benefit from an upturn in the UK and world economies.
A Return To Profitability
Indeed, 2014 is set to be an important year for Lloyds, as it is due to make a profit for the first time since 2009. If it meets its earnings per share (EPS) forecasts, Lloyds will trade on a price to earnings (P/E) ratio of 10. This is very attractive, especially when the FTSE 100 has a P/E of 13.8, and shows that Lloyds offers superb value at its current price level.
A Top-Notch Yield
As well as offering good value and being on-track to post its first profit in five years, Lloyds is also set to become a heavyweight income play. Certainly, the current forecast dividend yield of 1.9% is nothing to get too excited about, but the combination of growing profit and a high payout ratio could make this change significantly over the next couple of years.
Indeed, Lloyds is forecast to grow earnings by 9% next year, which will allow it to pay higher dividends per share. However, it is planning on increasing its payout ratio to around 65% by 2016. This would be a game changer and would equate to a dividend yield of around 4.5% at current prices next year and a yield of up to 7% in 2016, assuming it meets its target of paying out 65% of profit as a dividend and its share price stays at the same level as it is at present.
A yield this high is unlikely to be beaten by many of its peers. That’s why Lloyds may look like a rather disappointing income play right now, but has the potential to become your best income holding over the next couple of years.