Is Lloyds Banking Group PLC the star stock in the Footsie?

Does Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) offer significant upside potential?

Lloyds share price
Lloyds share price

Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) may not be one of the Footsie’s best performers in recent years, but I think that the bank could deliver high total returns over the coming years.

The fact that its shares now trade lower than they did five years ago suggests there could be a value investing opportunity on offer. That’s particularly the case since the company has improved its operational and financial performance over that period.

For instance, Lloyds is now no longer part-owned by the government/taxpayer. It has become increasingly profitable, and is due to deliver positive EPS growth over the next two financial years.

Further, it has improved the strength of its balance sheet, while also cutting costs and becoming more efficient. Both of these changes could make it more sustainable, as well as lower its risks versus sector peers.

In spite of these developments, the stock has a PE ratio of around 9 at the moment. There are not too many shares with lower ratings than the bank, and this indicates to me that it could offer a margin of safety.

Sure, there are risks ahead for the Lloyds share price. Brexit remains a threat even though progress is being made with negotiations in my view. The performance of the UK economy has also contributed to downbeat investor sentiment to my mind, with the focus of the bank being on the domestic economy.

However, overall I feel there is a good mix of a low valuation and improving profit potential on offer from the bank. It may not be the most exciting stock, and it may only be of interest to contrarian investors at the moment. But in the long run I feel that it could deliver strong returns that help it to outperform the FTSE 100 in future years.

About Robert Stephens 5353 Articles
Robert Stephens is a CFA Charterholder and an Equity Analyst by trade. He is a passionate private investor who has been buying and selling shares for many years, owning a wide range of UK shares in the process. He has written for Citywire and The Motley Fool US and now runs his own business. To contact Robert, please email or use one of the other contact methods available on the 'Contact Us' page