Picking shares to buy and hold for your investment portfolio is never an easy task. Finding the best shares for the long term is all about buying stocks based on their future, not current, potential and at the same time staying away from those businesses that won't stand the test of time.
The UK banking sector is not the first market you'd think of when looking for long-term equities but Lloyds(LSE: LLOY) has many of the traits required for a retirement play.
For example, the UK banking market is dominated by four main players, Lloyds being one of them and no matter how hard regulators have tried, customers are willing to let this oligopoly market persist. This is good news for Lloyds, which can cross-sell products and generate a higher return for investors due to economies of scale.
The nature of the UK banking market is not the only reason why Lloyds is a great long-term investment.
Past performance is not a guide to future returns
Investors are always being warned that past investment performance is not a guide to future returns, which is true. Just because a stock has returned 10% per annum for the last 10 years does not mean this performance will continue. However, past business performance can provide a valuable insight into how a company might continue to perform and sooner or later, this performance will be reflected in the share price.
Since the financial crisis, Lloyds' business performance has been second to none. While many of the bank's European peers continue to struggle Lloyds, despite its problems and bailout, has returned to profitability, built a fortress balance sheet, resumed cash returns to investors and is now back on the lookout for acquisitions to drive growth. City analysts expect it to report a pre-tax profit of £6.4bn for 2016 and at a time when most of Lloyds' peers are still shedding assets and staff, management's decision to buy credit card provider MBNA stands out.
Room to run
Considering what Lloyds has been able to accomplish over the past nine years, in a hostile environment, it makes me believe that over the next five or 10 years as the bank begins to grow, investors will be richly rewarded.
The figures support this argument. At the end of the third quarter, Lloyds reported a tier one capital ratio of 13.4%. Of this total, 0.8% is expected to be used in the MBNA acquisition. City analysts are expecting the bank to generate 0.7% of capital during the first half of 2017, which would more than cover the acquisition cost.
Lloyds' management has previously stated that the bank will return any additional capital to investors. Capital over a tier one ratio of 12% is considered surplus to requirements. To put it another way, Lloyds has moved from being an institution on the edge of failure nine years ago to a cash machine. It's no surprise City analysts believe the bank can return 25% of its market cap to investors via special dividends and buybacks over the next few years.
The bottom line
All in all, after several years of restructuring, Lloyds is now well positioned to generate market-beating returns for investors. As a result, the bank may be the perfect long-term investment.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.