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When I first bought Lloyds Banking Group (LSE: LLOY) shares back in 2010, I really thought I’d be writing about a storming share price run a lot sooner than today.
But we’re in it for the long term, right? And shareholders have been getting some decent dividends to make up for their share price disappointment. But over the past 12 months it really does look like Lloyds might finally be shaking off the bad days.
We’re looking at a 41.5% share price rise over a year. Add a 5.8% dividend yield (based on the share price a year ago), and that £10,000 could be worth £14,729 today. A cracking result.
What next?
That’s the past successfully predicted. But what about the future, which really is a lot more important?
Well, Lloyds has once again managed to cloud what might otherwise have looked like a clear and sunny horizon. It’s currently tied up in the car finance mis-selling scandal that made it to the Crown Court in April. It’s all about lenders paying commissions to dealers, allegedly without proper disclosure.
That can incentivise higher interest rates. And it seems about two and a half million borrowers have made claims. We won’t know the outcome until July, and it could cost lenders dearly in damages.
I hate to make predictions. But I think it could all make a bit of a dent in Lloyds’ chances of another 41.5% share price rise in the next 12 months. We’ll know about the damage soon enough, so I don’t see much point in guessing further. But it’s worth looking ahead in general.
Compounded dividends
The rise in Lloyds shares in the past 12 months has lowered the dividend yield. And we’re looking at a forecast for a modest 4.1% now. But that could still add £410 to an investor’s passive income stream if they take the cash.
And for those who reinvest it in more shares every year, it could add up to a pretty reasonable long-term reward. In fact, a 4.1% annual dividend reinvested and compounded for 20 years could turn £10,000 into a pretty decent £22,340.
And that ignores any dividend rises. Forecasts suggest the Lloyds dividend yield could reach 6.1% by 2027 (if the share price doesn’t move). If we work on a 6.1% return compounded over 20 years, we might expect that to build to £32,700.
Oh, and that doesn’t account for any share price gains, though that could be two-sided. It would mean greater capital appreciation, but lower future percentage yields to compound.
Long-term buy?
If Lloyds performs as the City analysts predict and grows its earnings in line with forecasts, we could see a price-to-earnings (P/E) ratio of only seven by 2027. If that comes off, it suggests we could see further share price rises.
Profits could be squeezed when interest rates fall further. But all in all, does the outlook make Lloyds a stock worth considering for long-term gains? I think it has to be. But I’m sure I’ll be getting a bit nervous as we get closer to July’s Crown Court verdict.
