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Should You Follow The Government And Sell Shares in Lloyds Banking Group PLC This Christmas?

With Lloyds (LSE: LLOY) (NYSE: LYG.US) having passed the recent Bank of England stress test, Chancellor George Osborne has decided it is the right time to further reduce the government’s stake in the part-nationalised bank. Crucially, no shares will be sold at a price that is lower than the original price paid and the process will be somewhat different to that which was undertaken when the previous chunks of the bank’s shares were sold off.

This time around shares in Lloyds will be drip fed into the market and, over the next six months, this could equate to share sales of around £3 billion, which would reduce the government’s stake in the bank from the original 43% to less than 20%.

Impact On Investors

On the one hand, the ‘drip feeding’ of shares onto the market can be a bad thing for the share price. After all, it means that there is a constant supply of shares for sale at any price that exceeds the 73.6p originally paid by the government. However, in the case of Lloyds it has been stipulated by the government that no more than 15% of the aggregate total trading volume in the company is to be sold over the duration of the plan. This essentially means that there will not be a glut of shares being offered for sale, which should lessen the impact of the government’s decision on Lloyds’ share price in the short term.

Looking Ahead

Clearly, the sale of the government’s stake in Lloyds is a good thing for investors over the medium to long term. It shows that the bank is well on its way to improved financial health and, after passing the Bank of England’s stress test, investors in Lloyds should have a degree of confidence in its future viability as a business.

Furthermore, with Lloyds set to return to profitability in the current year, now could be a great time to buy a slice of the bank. That’s at least partly because a return to profitability could mean a return to dividends and, with shares in Lloyds offering superb value for money, the prospective yield for 2015 is surprisingly high.

For example, Lloyds is expected to pay out 2.9p in dividends per share next year and, with shares in the bank trading on a P/E ratio of just 9.6, it equates to a hugely appealing dividend yield of 3.9% next year.

In addition, Lloyds seems to have become leaner, more efficient and, ultimately, more profitable as a result of its rationalisation programme that has been ongoing for the last few years. While there is still work to be done in this respect, Lloyds is very much on the road to recovery and, over the medium to long term, could prove to be a very lucrative investment. Therefore, investors may wish to buy, rather than sell, shares in Lloyds this Christmas.

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Peter Stephens owns shares of Lloyds Banking Group. 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.