Lloyds Banking Group PLC’s 15% Share Price Drop Makes It An Even Better Buy

Among private investors, Lloyds Banking Group (LSE: LLOY) is one of the most actively followed and researched FTSE 100 stocks, and with good reason. The bank was a dividend machine before the financial crisis and investors are hoping it will be again. Many have high hopes for Lloyds and I’m one of them.

The outlook is certainly promising for dividend seekers. Lloyds may yield a meagre 1% today but that’s forecast to fly to 5.1% by the end of this year. Given that I reckon the Bank of England is unlikely to hike base rates this year, that will sound like income manna to many. Especially since Lloyds is keen to reclaim its perch as a solid, UK-focused retail and business bank with no designs to play casino capitalism again.

Falling Down

Yet despite its great prospects and avid investor interest, the share price has plunged lately, falling 15% over the last six months. It even trades 10% lower than two years ago. Not everybody is buying into the Lloyds recovery stories, at least not yet.

One reason is historical of course. People still don’t trust the banks, nor do they trust the recovery, or the wider investment prospects for 2016. The FTSE 100 is 10% lower than two years ago when it stood at 6,730. But Lloyds has fallen twice as fast as the index in the last six months, so recent struggles can’t all be blamed on the market sell-off.

Mis-sold snd rigged

Several factors weigh on Lloyds. First, we still don’t know when the steady flow of mis-selling and rate-rigging scandals will cease. The banking cultural revolution is far from complete and tales of renewed hard-selling tactics continue to hit the headlines. Further PPI penalties are no doubt on the way. Fine inflation is a threat to all the banks as the regulators hang tough.

Another concern is the short-term impact on the share price of the forthcoming retail sale of Lloyds and the offloading of the rest of the state’s holdings. The government hopes to have Lloyds 100% in private hands by June. Selling off 6.6bn shares – the equivalent of a 9.2% stake in the bank worth £4.8bn – could sink the value of existing holdings.

Today Lloyds trades at around 71p, below the Treasury’s break-even price of 73.6p, so maybe we can’t expect much progress until the retail sell-off is out of the way in the spring. 

I like Lloyds

While many investors welcome Lloyds’ newfound domestic focus, others find it less exciting than the former global-growth-at-all-costs banking model. Signs that the UK economy is largely being driven by growing consumer debt will also worry many, suggesting there are dangers at home as well.

I still believe in Lloyds. A prospective yield of 5% by the end of this year, which could rise to 6% or 7% thereafter, should smooth away most investor concerns. Some may prefer to wait until the retail sale, with its ‘buy 10, get one free’ incentive and 5% discount to the stock market price. But the recent share price plummet makes it a buy today, even without government handouts.

Lloyds isn't the only exciting income prospect on the UK market today.

If you're looking for a top dividend stock with great prospects then check out our BRAND NEW report A Top Income Share from The Motley Fool.

While many leading UK companies are slashing their dividends, this FTSE 250 star accelerated its payout at astonishing speed in 2015.

The Fool's crack team of analysts is so impressed by this company's ambitious growth plans they are happy to call it one of the best income stocks on the market today.

Click here to enjoy this FREE, no-obligation wealth report. It will be yours in moments and won't cost you a penny.

Harvey Jones 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.