Share pick for 2020: Lloyds Banking
The political situation in the UK is clearer than it has been for some time and the stage looks set for Lloyds’ (LLOY) steady approach to win favour with the market.
The shares are cheap. According to consensus forecasts the shares trade at parity with book value and Shore Capital’s estimates imply a price-to-earnings ratio for 2020 of 8.1.
With the PPI issue largely in the rear view mirror Lloyds can get on with doing the basics of banking well and rewarding shareholders with generous returns.
The company’s recovery from the financial crisis has been built on getting back to the old ‘boring’ retail banking model.
It funds a good chunk of its (almost exclusively UK) operations from customer deposits, secured through savings and current accounts, and offers mortgages, personal loans and credit cards.
The company has also strengthened governance of risk, by establishing a management structure which can hold the board to account and making bonuses dependent on long-term rather than short-term outcomes.
This model is helping deliver strong profitability and cash generation, underpinning a key attraction of the stock, namely its dividend.
Before the credit crunch banks were widely bought for income and Lloyds is renewing its credentials in this area. Since dividends were resumed in 2015, the company has grown its annual payout from 0.75p to more than 3p per share.
With the PPI provisions behind it – the deadline for claims having elapsed in August 2019 – the company could now be able to increase its generosity to shareholders. This might even involve resuming the share buybacks it suspended in September as well as continuing to deliver material growth in the dividend.
Like its rivals Lloyds comfortably cleared the latest Bank of England stress tests and it looks to have plenty of headroom to absorb the requirement to increase its capital buffer to deal with distressed economic conditions.
Greater levels of political certainty and increased Government spend could help give the UK economy a boost in 2020 and there is even a chance the Bank of England might use the current window of opportunity to raise interest rates (thereby benefiting the banks) to give it greater flexibility to deal with any future downturns.
The next obvious catalyst for the shares will come with full-year results on 20 February with the focus likely to be on the level of shareholder returns and the near-term outlook.