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After a 15% rise in 2021, is the Lloyds share price heading for a strong recovery?

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I was surprised when fellow Motley Fool writer Christopher Ruane pointed out that Lloyds Banking Group (LSE: LLOY) is the only penny stock in the FTSE 100. That’s treating anything priced under £1 as a penny stock, so not rock bottom. Still, at just 43p today, the Lloyds share price has followed a penny share trajectory since before the financial crisis, when it was up over £3.

And, that 43p price is around the highest in 2021 so far. As recently as February, Lloyds shares sold for only 33p. And they dropped as low as 24p in 2020.

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Lloyds share price turning

Are we looking at a down-and-out share to avoid? Or a long-awaited recovery? Since the bank released full-year results in February, the market does seem to have turned a little bullish. Despite 2020’s fears for the banking sector, the figures looked nowhere near as bad as they might have been. And after the Lloyds share price bottoming that month, it’s slowly been climbing back.

Profits were still way down on previous years, what with Brexit and Covid-19 and all that. But some key measures looked good to me. Lloyds’ open mortgage book grew by £7.2bn in the year. I see that as important for two reasons. One is that Lloyds is a UK-focused bank now, and domestic mortgages are especially important. Secondly, the pandemic put pressure on the housing market, and there were even fears of a bit of a collapse. Thankfully that hasn’t happened, and we’ve even seen shares in our top house builders strengthening in 2021 alongside the Lloyds share price.

Domestic banking strength

I liked seeing customer deposits up by £38.9bn too, with a loan to deposit ratio of 98%. Coupled with strong liquidity measures, I see no cash flow problems at all. And that, I hope, can underpin the Lloyds share price in the coming years.

But, with a share price still hovering down around 43p, it’s clear that not everyone in the market shares my optimism. I think that’s partly down to the lure of Lloyds being mostly potential. There’s little being delivered right now. I bought Lloyds shares back when the bank was recovering strongly from the financial crisis, and paying a solidly rising dividend.

The dividend was key for me, and it’s now history. For 2020, Lloyds announced a dividend of a mere 0.57p per share. Never mind the 6% dividends I was enjoying at their peak, that’s just 1.3% on today’s Lloyds share price. And it’s not much more than half a percent on the price I originally paid.

What upside?

So that’s the downside. Crisis after crisis, resulting in years of disappointment. And the upside is mere potential, which is far from certain. But the low dividend is not a true measure of what Lloyds wants. No, it was the maximum the bank was allowed to pay under current regulation. And until we see a return to a free market, we can’t put a proper value on the Lloyds share price.

But I do see potential for sustained growth now, coupled with strengthening dividend payments. I’m holding. I might even buy some more.

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We think it has the potential to become the next famous tech success story.

In fact, we think it could become as big… or even BIGGER than Shopify.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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