Lloyds (LSE: LLOY) shares have been one of the worst-performing investments to own in the FTSE 100 this year. Indeed, in 2020 alone, the stock is down around 50%, excluding dividends. This decline might put some investors off the UK’s largest mortgage lender.
However, the outlook for Lloyds shares over the long term is positive. As such, buying the stock after its recent decline could lead to attractive income and capital gains over the long run.
Lloyds shares on offer?
Government-imposed lockdowns designed to control the spread of the coronavirus have caused an economic crisis across Europe. Investor sentiment towards financial stocks such as Lloyds has been impacted as a result.
The reasons why investors have decided to dump their investments in these organisations are clear. Lenders such as Lloyds face the risk of rising loan losses and lower demand for borrowing in the short term as companies and customers try and adjust to the new normal.
This suggests Lloyds shares could see further pain in the short term. Nevertheless, the lender is much stronger financially than it was in the last economic downturn. It’s unlikely Lloyds will need another state bailout this time around. Therefore, the company seems well-positioned to weather the storm and emerge on the other side in one piece.
An economic recovery
When the crisis is over, Lloyds could benefit from an economic recovery. The UK economy has suffered many periods of disruption in the past. On some occasions, it has taken many years for the economy to regain lost output, but every single time, it has come back stronger. It is highly likely we will see the same pattern this time around, which may be good news for Lloyds shares.
For example, as mentioned, Lloyds needed a bailout in the financial crisis. But over the past decade, it has become stronger and more profitable than ever before. The UK government has sold its stake and before the coronavirus crisis, Lloyds shares were one of the most attractive income plays in the FTSE 100.
A margin of safety
Of course, there’s no guarantee the same pattern will emerge this time around. However, with Lloyds shares down nearly 50% since the beginning of the year, the stock appears to offer a wide margin of safety.
Buying a stock with such a wide margin of safety gives investors a level of protection against further adverse developments. It helps improve the chances of a positive return over the long run because even if there is only a slight improvement in its fortunes, the potential for profits could be substantial.
As such, now could be a great time to take advantage of the market’s short-term way of thinking and buy Lloyds shares at a deep discount. The stock could potentially offer substantial capital gains as a steady income stream from current levels.
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Rupert Hargreaves owns no share mentioned. 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.