Investors in Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) had a rare old time in 2012 and 2013 when the share price more than tripled from 27p to 87p. It’s not often an institution of this size turns into a three-bagger.
Last year, it soon became clear that the recovery had run its course, as it became impossible to sustain this rate of acceleration.
Lloyds has been idling ever since, and currently trades at around 78p, marginally above its bail-out price of 73.6p. Momentum has stalled.
For me, this makes Lloyds a more tempting prospect than a year or so ago, when the bandwagon was still rattling happily along.
It’s A Scandal
The wider UK market also went into neutral in 2014, as company valuations struggled to play catch-up with the post-financial crisis bull run, and faltered on geopolitical worries. Lloyds was part of that process.
It was also heavily implicated in the UK banking malaise afflicting the UK banking sector, damaged by rate-rigging and mis-selling scandals, fine inflation, banker bashing, tax raids and the subsequent retrenchment across the industry, as Barclays dropped its attempts to crack Wall Street and Lloyds reduced its territorial spread from 30 nations to just six.
Lloyds also suffered personal problems, such as disappointing stress test results, investor lawsuits, its controversial plans for job cuts and branch closures, and the PPI scandal, which has cost it £12bn so far, more than any other bank.
Underlying Truths
Underlying earnings and results were far more racy than its sluggish share price performance would suggest.
Profits in 2014 rose 26% to £7.8bn. A falling loan-to-deposit ratio allowed it to reduce its dependence on wholesale funding, while risk-weighted assets fell £32bn to £240bn.
Its simplification programme is cutting costs by around £2bn a year.
There is still a way to go. The election is casting a shadow over its immediate prospects, and the result will partly determine what happens to the remaining 20% taxpayer stake.
5.3% Income Next Year
Lloyds is becoming what it was before: a leaner, lower risk operation focusing on the mature UK market, with a sniff of a dividend.
It may pay a meagre 0.75p a share today, but chief executive Antonia Horta-Osorio has a medium-term goal of paying out half its company earnings as dividends.
Currently, it yields 1%, but that is forecast to hit 3.5% by the end of this year, and 5.3% by December 2016.
Devaluation isn’t that demanding either, at around 9.7 times earnings.
Lloyds may have stalled over the last 15 months, but that gives you an opportunity to jump in before the share price accelerates again.