Lloyds: Sweet Spot Over the Pond

09/24/2015 10:00 am EST

Focus: STOCKS

Bryan Perry

Editor, Cash Machine, Premium Income, Quick Income Trader, Instant Income Trader

An enormously enticing theme operating under the radar is the bottoming out of the European recession and what that means to a very bruised and battered banking sector, suggests Bryan Perry, editor of Dividend Investing Weekly.

Of the major banks within the European Region, my favorite of the lot is UK-based Lloyds Banking Group PLC (LYG).

Lloyds has several catalysts working in its favor. The bank has been busily disposing of assets that it views as non-core, with news flow over the course of 2014-2015 being dominated by such items.

In addition, Lloyds is aiming to pay out up to 70% of earnings as a dividend by 2016 which has my full attention.

With a current payout ratio of only 42%, price-to-earnings multiple of 8.5 times, and capital strength steadily improving, the current 3.3% dividend yield has a lot of room to grow.

As for projected earnings, they are unpredictable because of the unforeseen pace of cost cutting and the paying down of bailout funds.

Earnings per share are forecast to grow by 5-10% in 2015 alone, making Lloyds one of the most attractive growth stocks in the FTSE 100 and poised to become another $5 stock that could see $20 by sometime in 2017.

Does it sound heady? Shares of LYG traded north of $45 in 2007, so if it restores 50% of its former pre-recession value, investors can realize a potential return of 300% before including any dividend income.

In addition, there has been steady divestiture by the UK government from a 33% ownership stake in 2013 to 13% today, with complete divestiture anticipated by 2017.

The template for getting into the leading banks as a major economic region starts turning the corner is in place right here in the United States.

The ECB is in the midst of a $1.6 trillion quantitative easing program; this is likely to be accelerated in the weeks ahead to fuel further business investment and consumer lending.

Against this backdrop, smart money is quietly backing up the truck at the London Stock Exchange and loading up on shares of Lloyds.

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