Best Stock for 2008: Lloyds TSB

Ring in the new year with more stocks for 2008.

2007 was not a kind year to financial stocks, to say the least. The convergence of real estate bubbles, subprime mortgages, and a global credit crunch sent shares of major U.S. banks such as Citigroup (NYSE: C), Merrill Lynch (NYSE: MER), and Bank of America (NYSE: BAC) downward for the year.

The financial crisis wasn't limited to U.S. banks: Swiss banker UBS (NYSE: UBS) and Puerto Rico's Banco Popular (Nasdaq: BPOP) also suffered last year.

Given that the markets still don't know the full extent of the subprime mess, some may be hesitant to jump into any financial stocks whatsoever. But there is a bank out there that is not a dreadful stock to avoid. In fact, it's a buy at these prices.

Fish and chips, guv'
Lloyds TSB (NYSE: LYG) is a U.K.-based retail bank (with limited exposure to the U.S. subprime collateralized debt obligation (CDO) market) that actually generates most of its revenue from its life insurance and pension/investment wing. It also sold its Abbey Life insurance unit to Deutsche Bank (NYSE: DB) in August for about $2 billion, because the company thought it was no longer a part of its core business.

Three main reasons to consider Lloyds in 2008:

1. Solid dividend payments: Lloyds currently doles out a dividend yield around 7.4% for U.S. American depositary receipt holders and raised its interim dividend for the first time in five years. That shows not only that the company continues to generate sufficient cash, but that management expects good things in the future as well. Even better, thanks to the 2003 U.S.-U.K. tax treaty, the U.K. does not withhold tax on dividends paid to U.S. shareholders. (Please consult a tax professional if you're unsure how this might affect you.)
2. A hedge against a weak U.S. dollar: Since Lloyds does most of its business in the U.K. and Europe, it doesn't have as much exposure to the weak U.S. dollar as other multinational banks do. Moreover, as the dollar weakens, the dividend payments increase for U.S. shareholders when converted from U.K. pounds. In the U.K., Lloyds' dividend yield is about 7.2%, but when converted to U.S. dollars, it gets a slight boost.
3. Undervalued: Last November, Motley Fool Inside Value senior analyst Philip Durell pegged Lloyds as a stock to watch in 2007. His core investment thesis remains true today, even though shares are trading 15% lower than they were 13 months ago. In fact, the Inside Value team has pegged Lloyds' intrinsic value higher than its current market price.

London calling
Over on Motley Fool CAPS, the Fool's free investment community, investors are also bullish on Lloyds. It currently commands a five-star rating (the highest) with 97% of those who rated the stock expecting it to outperform the S&P going forward.

What do you think about Lloyds? You can make your voice heard on CAPS right now, where more than 79,000 other investors are waiting to hear what you have to say. To rate Lloyds and explain your investment thesis, click here.