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

Recent talk of a very generous target dividend payout ratio is great news for shareholders in Lloyds Banking Group PLC (LON: LLOY).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

Of course, you may be looking for other ideas in the FTSE 100 and, if you are, I would recommend this exclusive wealth report which reviews five particularly attractive possibilities.

All five blue chips offer a mix of robust prospects, illustrious histories and dependable dividends, and have just been declared by The Motley Fool as “5 Shares You Can Retire On“.

Simply click here for the report — it’s completely free!

> Peter owns shares in Lloyds.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Photo of a man going through financial problems
Investing Articles

I asked ChatGPT to name the FTSE 250 share it would buy in a heartbeat – and it went mad!

Harvey Jones wondered whether artificial intelligence was up to the job of finding him a brilliant FTSE 250 share to…

Read more »

Tanker coming in to dock in calm waters and a clear sunset
Investing Articles

Is the BP share price primed for lift off?

As an activist investor takes a substantial holding in BP, Andrew Mackie assesses what it will take to energise the…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

No savings? I’m using the 5-step Warren Buffett method as I aim to get rich

Christopher Ruane outlines a handful of investment techniques he uses, inspired by the incredible stock market record of Warren Buffett.

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

With a spare £3,000, here’s how a new investor could start buying shares

Our writer explains how someone with a few thousand pounds and no prior stock market experience could start buying shares…

Read more »

UK money in a Jar on a background
Investing Articles

£10,000 invested in Greggs shares in 2020 has made this much passive income…

Greggs shares have struggled lately due to economic weakness and rising costs. Are they still worth considering for an ISA…

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

Don’t look now, but the FTSE 100’s beating the S&P 500 in 2025…

So far this year, UK stocks have been doing better than their US counterparts. So is the FTSE 100 the…

Read more »

Investing Articles

How much would someone need in UK shares to earn £5,000 in passive income each month?

Thousands of Stocks and Shares ISA investors have built up more than a million pounds and can sit back and…

Read more »

Investing Articles

£10,000 invested in Tesla stock 1 month ago is now worth…

Tesla stock is remarkably volatile for a mega-cap company. While this presents some opportunities for investors, it’s also inherently risky.

Read more »