Lloyds' expected dividend paves way for government shares sale

(Repeats Feb. 20 story)

* Lloyds set to announce first dividend since financial crisis

* Payout could enable sale of chunk of shares later in year

* RBS (LSE: RBS.L - news) sale seen as unlikely in next 18 months -sources

By Matt Scuffham

LONDON, Feb 20 (Reuters) - Lloyds Banking Group's anticipated return to dividends this week for the first time since the financial crisis will help ease the way for the government to sell its remaining shares in the bank, industry sources said.

Lloyds is expected to confirm it has been cleared by Britain's financial regulator to pay a modest dividend for the 2014 financial year when it reports full-year results on Friday. Analysts expect a payout of about 1 pence per share, according to Thomson Reuters data.

Lloyds declined to comment.

The dividend, which will be the first since Lloyds was rescued at a cost of 20 billion pounds ($30.75 billion) to British taxpayers during the financial crisis of 2007 to 2009, is seen as a key milestone in the bank's recovery.

Industry sources say it could enable UK Financial Investments (UKFI) - which manages the government's shares in bailed out banks - to sell another chunk of shares to institutions such as pension funds and insurers and possibly to retail investors later this year.

Restarting dividends will make the shares more attractive and offering shares to retail investors would enable the government to sell more and give taxpayers the opportunity to benefit from the bank's recovery.

Before the financial crisis Lloyds had a record of being one of the highest dividend paying stocks in Britain, handing over half its profit to shareholders in 2005 and 2006 and analysts say it could eventually pay out that much again.

In contrast the government is unlikely to start selling its 79 percent stake in Royal Bank of Scotland in the next 18 months, the sources said.

RBS is still facing a number of investigations into past misconduct and is working through a restructuring which includes shrinking its investment activities and international operations to focus on lending to British households and businesses.

Reuters reported on Friday that RBS is likely to write down the value of its U.S. bank Citizens (NYSE: CIA - news) by about 4 billion pounds next week, potentially wiping out much of its annual profit.

UKFI raised 7.4 billion pounds through two sales of Lloyds shares to institutions in September 2013 and March 2014, taking its stake to below 25 percent from 39 percent.

In December, it appointed Morgan Stanley (Xetra: 885836 - news) to gradually sell shares in the open market but progress has been slow.

Lloyds and UKFI have yet to disclose how many shares have been sold using that method. Under stock exchange rules, they would have had to if the government's stake had fallen below 24 percent.

Lloyds is expected to report a pretax profit before one-off items of 7.5 billion pounds, up from 6.2 billion the year before, according to a Thomson Reuters poll of 17 analysts.

RBS is expected to report this week a pretax profit of 4.1 million pounds, according to the average forecast from a poll of six analysts by Reuters.

($1 = 0.6504 pounds) (Editing by Susan Thomas)