MARKET COMMENT
Lloyds TSB Offers Value With 8% Yield

By Cliff D'Arcy
February 14, 2003

Lloyds TSB (LSE: LLOY)(NYSE: LYG), the UK's fourth-largest bank, today gave long-suffering shareholders a break by unexpectedly increasing its final dividend.

Many commentators had predicted the bank would be forced to slash its dividend, following rising bad debts and problems at its life assurance subsidiaries. However, Lloyds surprised many pundits by declaring a final dividend of 23.5p a share, to be paid on 7 May.

This increases the full-year dividend to 34.2p, up 0.5p (1.5%) on the 33.7p paid for 2001.

However, it's not all good news. Lloyds' earnings per share were down a hefty 21% to 32p (from 40.3p previously). This means that earnings didn't cover the dividend, which means that future dividend growth will be restricted until profits recover considerably.

Lloyds has confirmed that it wants to see the dividend cover move up from under 1 to around 1.5 times, which could foretell future dividend cuts.

Although Lloyds' overall income fell only fractionally - by £11m to £8.88bn from £8.87bn - operating expenses increased by £139m (3%) to £4.92bn. In the past, Lloyds has had an enviable history of raising profits while cutting costs, so the rise in expenses comes as a surprise after the bank cut 4,000 jobs last year.

Partly thanks to a whacking £282m (37.8%) increase in bad debts to £1.029bn, pre-tax profits fell by £554m (17.5%) to £2.61bn.

Lloyds also revealed a £2.9bn shortfall in its occupational pension schemes, thanks to falling stock markets, and plans to put in an extra £150m in 2003 and £300m in 2004 to support the funds.

On the other hand, customer lending did rise an encouraging 9% to £134.5bn, with deposits also rising (up 7% to £116.3bn). Furthermore, Lloyds increased its UK market share in savings, credit cards and personal loans, so it's getting more than its fair share of the UK credit boom.

After a disappointing start last year, Lloyds' share of the mortgage market improved in Q4, rising to 10% of net new lending (total new lending less repayments).

At today's share price of around 418p, holding the shares for the final dividend payout will return around 5.6% - not to be sniffed at. Given that the shares go ex-dividend on 26 February, with a record date of 28 February, current holders should hang on for their 23.5p a share.

Finally, with a juicy dividend yield of around 8.2%, income investors should consider tucking away some Lloyds shares in the hope that this return will be maintained.