On 9 December 2015, I boldly proclaimed that “Lloyds Banking Group (LSE: LLOY) is my top stock pick for 2016“. With harrowing inevitability, the share price started dropping almost immediately. At the time I tipped it, Lloyds traded at around 72p. Exactly two months later it hit a low of 56p, having fallen more than 20% in that time. Some tipster I turned out to be.
Laugh out Lloyds
Happily for my sense of self-worth, Lloyds has recovered from its shocking start to 2016. Today it trades at 67p, so it’s now down ‘only’ 7% since I tipped it. But that’s still a long way from the sunlit uplands I was envisaging. So what went wrong?
In December, markets were still anticipating a Lloyds retail investor flotation. It was supposed to be fully in private hands by June, but January’s market meltdown put a stop to that. Banks were at the epicentre of global storms, with British banking stocks suffering for the sins of their European cousins. So in part, Lloyds is an unlucky victim of wider circumstances. Yet it has actually fared much better than rival Barclays, for example, which is down 23% since 9 December, while Royal Bank of Scotland is down 15%. Lloyds still looks like one of the safer prospects in a troubled sector.Â
Lloyds leaps
Investors saw Lloyds in a more positive light when its 2015 results were published showing an underlying profit of £8.1bn, up 10%, and a healthy 15% underlying return on equity. The share price leapt almost 10% on the day, helped by signs that legacy issues such as the multibillion pound PPI hangover were now clearing. The results were another staging post on the comeback trail.
One reason I hailed Lloyds was for the “relatively conservative nature of its revamped business” and although that didn’t protect investors from January’s global meltdown, its Tier 1 capital ratio of 13.9% still has the beating of most banks across Europe.
Income machine
Lloyds won’t be immune from further stock market storms. And as I rightly stated in December, it won’t be a bumper growth stock. I also warned that earnings per share were forecast to fall 8% this year. The reason I singled it out for praise was for its glorious dividend prospects, concluding that: “With dividend payouts crashing all around it, Lloyds set to be the income hero of 2016.”Â
My confidence was repaid when management announced an additional special dividend of 0.5p per share at the end of February. This suggests to me that management is willing to reward the faithful, through thick and thin. Income seekers will be expecting more thick than thin, with markets forecasting that the stock will yield 6.5% by the end of this year, rising to an even juicier 7.6% by December 2017.
On 9 December you could buy Lloyds at 8.6 times earnings. Today, it’s valued at eight times. That makes it an even better buy today than it was then. I’m not alone in liking Lloyds: on Monday HSBC added the bank to its Europe Super 10, rating it a buy with a target price of 80p. Rather than being my worst EVER share tip, Lloyds could still prove one of my best. Just give it time.