Here’s why you’d be mad to sell Lloyds Banking Group plc!

One of the difficulties of being an investor is that share prices don’t always move in the right direction. In other words, profits aren’t smooth and steady, but rather come and go – often in a relatively short space of time. This can leave many investors feeling down about their portfolios and cause some to sell up and walk away, which is how many investors in Lloyds (LSE: LLOY) may be feeling right now. That’s because its shares have fallen by 12% in the last year and are showing little sign of a sustained recovery — especially following last week’s disappointing first quarter results.

However, when a company’s share price moves lower, it can signal a further buying opportunity rather than a moment to sell and reinvest elsewhere. That’s provided that the company in question is still offering a bright long-term future and isn’t a value trap that’s cheap for a very good reason. If it’s the former, buying a company with a depressed share price can lead to stunning gains.

This situation seems to be the one facing Lloyds at the moment. Despite its aforementioned share price fall, its prospects are still very bright. For example, it’s continuing to improve its balance sheet strength following a period of asset disposals. This leaves it not only better equipped to deal with a potential downturn, but has also caused Lloyds to become increasingly efficient – especially versus its sector peers. Therefore, it seems to be in a position through which to generate rapid profit growth in the long run.

Improving economy

In addition, Lloyds is likely to benefit from an improving UK and global economy. With it having a significant exposure to the UK housing market through its acquisition of HBOS during the credit crunch, Lloyds seems to be well-positioned to benefit from low UK interest rates that could boost the prospects for the UK property sector. And while the global economic outlook remains uncertain, growth rates are still relatively strong and the long-term outlook is positive due in part to the future prospects of the developing world.

As well as a bright future, Lloyds also seems to have a sound strategy that could cause investors to flock to its shares. Lloyds is in the process of gradually increasing its dividend payout ratio so that its yield is likely to rise over the medium term. In fact, Lloyds’ yield is expected to be as high as 7.5% in 2017 and this would put it towards the top of the FTSE 100 yield table. And with dividends still set to be covered 1.5 times, there’s scope for even greater increases in shareholder payouts over the medium term.

With Lloyds trading on a price-to-earnings (P/E) ratio of just 9, it seems to offer excellent value for money given its future prospects, income potential and strategy. So it could be argued that you would be mad to sell up even after the disappointment of the last year.

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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.