The FTSE 100 has risen 33% over the last five years. However, some companies have done much better than others. In fact, almost half have seen their shares rise 100% or more.
I’m currently looking at some of your favourite blue chips and analysing their prospects for doubling your money in the next five years. Today, it’s the turn of Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US).
A five-year hangover
Lloyds’ hangover from the 2008/9 financial crisis has dragged on and on. However, the next five years are likely to be very different from the last five.
Still, though, the Black Horse has to jump some final fences before it can start to run freely.
Bailed out by HM Government, the taxpayer still owns 25% of Lloyds. Commentators have been expecting the Treasury to dispose of its shares before next year’s general election. However, recent market volatility and geopolitical concerns are said to have spooked the Treasury about Chancellor George Osborne’s wish to get the public in on the share sale, although further sales to institutions are still on the cards.
Furthermore, Lloyds has yet to resume paying dividends. The company told us in May that it expects to apply to the Prudential Regulation Authority “in the second half” for permission to restart payouts; 12 weeks into the second half and we’re not yet any the wiser.
Still, I expect that these uncertainties will have been resolved by this time next year, and that Lloyds, which is expected to return to positive earnings this year (7.75p a share), will be looking a lot more sure of its step.
The next five years
Share price changes over any given period are driven by two things: growth (or decline) in earnings per share (EPS) and any change in the price-to-earnings (P/E) ratio.
Lloyds’ shares are trading at 76p at the time of writing, giving a current-year P/E of 9.8 if expectations of 7.75p EPS are on the button. In order to give investors a 100% price rise over the next five years, Lloyds would need to increase its earnings at a compound annual growth rate (CAGR) of about 15%. And maintain its P/E at 9.8.
I think a 15% CAGR is on the optimistic side, unless the UK economic recovery is much stronger than currently appears likely. Analysts have pencilled in EPS growth of 6.6% for Lloyds from 2014 to 2015. If we run that rate of growth through for five years, we get EPS of 10.67p, and a share price of about 105p at a constant P/E — or a rise of 38% from the current share price of 76p.
However, all may not be lost in the double-your-money stakes. In five years’ time — and a decade on from the financial crisis — Lloyds should be rated more highly than its current lowly P/E of 9.8. If the shares were to re-rate to the FTSE 100’s long-term average P/E of around 14, we’d be looking at pretty much bang on a 100% rise.
So, I think there’s a decent chance you could double your money with Lloyds over the next five years, particularly if you include dividends, which management has promised to crank up once it gets permission to start paying them again.