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Could Lloyds Banking Group PLC Slide Back To 60p?

After a great start to the year, shares in Lloyds (LSE: LLOY) have struggled over the past six months. Indeed, after jumping almost 20% between the beginning of January and middle of May, since the beginning of June Lloyds’ shares have undone all of their gains for the year and then some.

After recent declines Lloyds’ shares are now down by 4% year-to-date, excluding dividends. And thanks to this weak performance, Lloyds’ shares are now close to printing a new two-year low.

Change of heart

Lloyds’ recent declines seem to have been driven by a sudden change of heart among investors. At the beginning of the year the City’s outlook for the bank was relatively upbeat, profits were growing again, and Lloyds seemed to have put the majority of its past mistakes behind it. 

However, this view suddenly changed when Lloyds reported its results for the six months to the end of July 2015. While these results were relatively upbeat — underlying profit increased 15% year-on-year — an increase in customer redress provisions spooked the market.

The same happened a few months later when Lloyds reported its third-quarter interim management statement. Underlying profit increased 6% year-on-year for the first nine months of 2015, but underlying profit for the three months ended 30 September 2015 fell 8% year-on-year and total group income declined 4%. 

These results, which were worse than many City analysts expected, spooked investors who had bought into Lloyds’ recovery story. 

Long-term outlook

Lloyds’ sudden slowdown may have spooked some of the bank’s investors, but for long-term holders, there’s little reason to worry. The bank is still highly profitable and has a strong position in the UK retail banking market. 

What’s more, Lloyds has an extremely impressive capital position, one of the best in Europe and management is looking to return some of the bank’s excess capital to investors. Lloyds’ management has stated that the group will return excess capital to investors via special dividends and stock buybacks, alongside the group’s annual dividend payout.

City analysts believe that Lloyds could return £20bn to £25bn to shareholders over the next three years. Based on these figures, analysts have pencilled in a dividend payout of 2.4p per share for full-year 2015, 3.8p per share for 2016 and 5.6p per share for 2017. It’s likely that Lloyds will meet these forecasts as the bank is already over capitalised with a Tier one equity capital ratio of just under 14%, compared to the regulatory minimum of 12%. The bank’s capital ratio has grown by 1% since the end of 2014. 

All in all, for long-term income investors Lloyds’ shares should only become more attractive as they push lower. 

Back to 60p?

If Lloyds’ shares do push back to 60p, it’s highly likely that the market will soon push them back up to 80p. You see, Lloyds is already cheap, the bank currently trades at a forward P/E of 8.6. At 60p, Lloyds’ forward P/E will drop to a lowly 7.1 and the bank’s shares will yield 4%. 

Income investments like Lloyds are the perfect way to build wealth over the long-term. By reinvesting the dividends received from such investments, you can compound your wealth steadily without much effort at all.  

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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.