2014 has been a real let-down for investors in Lloyds (LSE: LLOY) (NYSE: LYG.US). That’s because, after rising by a whopping 61% in 2013, shares in the part-nationalised bank have fallen by 2% this year and are showing little sign of life.
Indeed, much better performance was expected, since this is the year that Lloyds is all-set to return to profitability, after posting a run of loss-making years throughout the credit crunch.
However, the possibility of profitability and a dividend has done little to ignite investor interest. Can we really expect the situation to be much different in 2015, and for Lloyds to beat the FTSE 100 next year?
The General Election
With the General Election taking place in May next year, Lloyds could find itself at the centre of a political debate surrounding the future of the banking sector. With the government still holding a stake in Lloyds, it would be of little surprise if the main political parties were to attempt to engage voters through new policies regarding what to do with the stake.
This could cause uncertainty in the future of Lloyds to mount and hurt sentiment in the early to mid part of 2015, while a change in government/government policy after the election could mean that the sale of Lloyds proceeds at a slower pace than is currently envisaged. Both of these changes could have a negative impact on Lloyds’ share price performance in 2015.
Dividend Growth
With interest rate rises seemingly taking a back seat as a result of lower-than-expected inflation, investor hunger for yields could see an uptick next year. Although Lloyds is only just beginning the process of paying dividends, it has grand aims for its shareholder payouts.
Indeed, Lloyds is aiming to pay out up to two thirds of profit as a dividend in 2016. This means that, at current prices, Lloyds could be yielding 3.9% in 2015, which is ahead of the FTSE 100’s current yield of around 3.4%. This could attract income investors to Lloyds and see a different group of investors (dividend hunters) maintain demand for the shares next year, which would clearly be positive news for the bank’s share price.
Looking Ahead
Based on current year forecasts, Lloyds looks exceptionally cheap. While the FTSE 100 has a price to earnings (P/E) ratio of 14, Lloyds currently trades on a P/E ratio of just 9.7. As a result, an upward rerating is a realistic aim for 2015 and, crucially, would not necessarily require a strong performance from the FTSE 100.
In fact, the performance of the UK economy could prove to be the major catalyst for Lloyds in 2015. With it being the fastest growing economy in the developed world, demand for new loans and a reduction in bad loans could prove to be the factors that matters most to Lloyds in 2015. As a result of this, as well as its income prospects and low valuation, Lloyds looks set to beat the wider index in 2015.