Lloyds Banking Group (LSE: LLOY) shares have climbed 31.7% over the past 12 months. That’s at the time of writing early on 12 June, and it might have changed a bit by the time you read this.

It’s enough to have lifted a £5,000 investment a year ago to £6,850 today. And dividends worth £240 paid during the period would push it to £7,090. We shouldn’t expect this kind of return every year, of course. But I see a high likelihood of a Lloyds investment compounding nicely in the coming years.

Valuation and forecasts

Where then, based on current forecasts, might Lloyds shares go in the next 12 months and beyond? Here are earnings, dividend and valuation forecasts for the next three years.

Is the forward P/E for 2026 a fair one? It’s some way short of the FTSE 100 average. And Lloyds does appear to be performing well. But right now, I do think that’s probably about right.

For me, a share price has to allow enough safety room to cover the risks. And as a reminder, the UK economy just shrank 0.1% in April. Plus inflation is still high, putting a lot of pressure on the mortgage market. With Lloyds such a big mortgage lender, I reckon the safety we need is probably there… but only just.

So what’s it worth?

For the P/E to remain at the current level, we’d need to see Lloyds shares reaching 119p in 2027, and 138p by 2028. That would imply share price rises of 18% and 37% over one and two years, respectively.

And that would suit me just fine. Especially if I could expect my dividends to keep on growing progressively, which seems likely…

Going forward, reflecting increasing confidence in our capital generation, the group will now review excess capital distributions in addition to the ordinary dividend every half year.

FY 2025 results

Lloyds sounds like a company confident about future cash flow, and likely to keep rewarding shareholders with some of it.

Things to watch

Fellow Twelfth Magpie Writer Stephen Wright has highlighted a few potential pitfalls for would-be Lloyds investors. They include…

• We might be near the top of a bank sector cycle.
• The lending environment is increasingly competitive.
• A 70% premium to tangible book value might be too steep.

Those are very real concerns. And potential new investors should weigh them against broker optimism. We also shouldn’t put too much confidence in forecasts.

Lloyds certainly isn’t the screaming must-buy bargain I saw a few short years ago. But for long-term investors looking for steady, and growing, dividend income, I still rate it as a worthy contender.

Should you invest £5,000 in Lloyds Banking Group Plc right now?

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Alan Oscroft owns shares in Lloyds Banking Group.