Lloyds Banking Group PLC Goes From Strength To Strength

The Motley Fool

If there's one thing I've learnt in business, it's that a lot of small steps that follow a clear strategy can, over time, produce quite staggering results.

For instance, it is far easier to grow a business by expanding organically, gradually acquiring good customers and suppliers over time to build a fundamentally sound operation, as opposed to making acquisitions and taking one huge leap to try and reach the same place.

So, I've been encouraged in recent months with the progress made by Lloyds Banking (LSE: LLOY) (NYSE: LYG.US) as it continues to mount a comeback from the depths of the credit crunch.

Indeed, the latest step made by Lloyds Banking may only be viewed by the market and my fellow Fools as a relatively minor news item, but for me it provides further evidence that this company is well on track and is going from strength to strength.

The item in question is the recent sale of a portfolio of loans for more than £250 million, which the bank believes will further streamline its business and help it to meet more onerous regulatory capital demands.

The loans are considered higher risk because they were leveraged and extended to companies that already had substantial amounts of debt. So, their sale is good news for the bank because it means a more stable and predictable portfolio of assets in future.

Indeed, the sale fits in with Lloyds Banking's long-term plan to shrink the business, make it more streamline and produce a bank that requires less capital for a higher return. The sale of the portfolio of loans is yet another small step in the bank's achievement of this goal.

When this comeback trail is viewed alongside the commitment of the CEO to aim to pay between 60% and 70% of earnings out as a dividend within three years, it makes income-seeking investors like me become far more bullish about the shares.

Indeed, although Lloyds continues to make a loss, it is forecast to return to profit this year, with the bank having a forward price-to-earnings (P/E) ratio of 15. Looking an additional year out means the P/E ratio falls to 11.8 as a result of double-digit growth from 2013 to 2014.

Meanwhile, if 65% of 2014 earnings were paid out as a dividend, shares would currently yield an impressive 5.5%.

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