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Why The New Dividend Policy Is A Boon For Shareholders In Lloyds Banking Group PLC

A key statement that came out of Lloyds Banking Group‘s (LSE: LLOY) (NYSE: LYG.US) recent results was that its CEO set a target for 70% of earnings to be paid out as dividends. The timescale for achieving this aim is three years and, to me, this sounds very generous.

Indeed, after announcing its recent rights issue, Barclays felt the need to sweeten the deal with shareholders by committing to pay out between 40% and 50% of earnings as dividends. For Lloyds to aim for 70% shows not only how ambitious the CEO is, but also how crucial shareholder returns are likely to be to the company in future.

Interestingly, analysts are currently forecasting that Lloyds will make earnings per share of 8p in 2016. Assuming the company is able to payout 70% of this would mean that dividends would be 5.6p per share. With shares currently trading at 75.5p, this would give a yield of 7.3% — not bad for a bank that is still in recovery mode.

Of course, it is all too easy to look ahead and take it as given that the company will hit its target. However, I believe that the ambition of the company and its focus on shareholder returns can only be a good thing for those of us who own a stake.

Indeed, such a clear focus bodes well for shareholders who have had a dismal past five years. In addition, Lloyds has substantial potential to grow its earnings. Forecasts for the current year are for earnings per share of 5p; however, this is forecast to increase to 6p in 2014, 7p in 2015 and (as mentioned) 8p in 2016. Suddenly, a price-to-earnings (P/E) ratio (using last year’s earnings) of 38 does not look so high should the company achieve such impressive growth rates.

As always, there will be many ‘ifs’ and ‘buts’ as to whether or not such forecasts and targets can be met. However, a generous dividend policy that puts shareholders at the ‘front of the queue’ for a change is, in my view, great news.

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> Peter owns shares in Lloyds.