Today I am looking at why Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) is a robust dividend selection.
Dividends poised to spill forth soon
Although the question of when banking giant Lloyds will once again begin shelling out dividends remains to be decisively concluded, the firm continues to make all of the right noises. Indeed, Lloyds confirmed in last month’s half-year update that it will be making its case to the Prudential Regulatory Authority in the coming months to get dividends rolling again, although it cautioned that any payouts are likely stand at a ‘modest level‘.
And broker consensus certainly points to a resumption of shareholder payouts sooner rather than later, with Lloyds expected to get the ball rolling with a total dividend of 1.3p per share this year. With the bank’s payout policy likely to be well under way by this point, the dividend is predicted to rise to 3.2p in 2015.
Consequently Lloyds carries a yield of 1.8% for this year, well below a forward average of 3.2% for the FTSE 100 as well as a corresponding readout of 3.1% for the entire banking sector. But next year’s projected dividend drives the yield to an impressive 4.3%.
Transformation to deliver solid growth
Following four consecutive years of losses, Lloyds’ ongoing restructuring work is expected to begin to pay off handsomely from this year onwards — forecasters anticipate the bank will shrug off a multitude of legal scandals and snap from losses of 1.2p per share to earnings of 7.6p in 2014, with a further 8% improvement to 8.2p is pencilled in for 2015.
This bounceback leaves dividends well covered by earnings during the period. With payouts only expected to resume during the second half of the year, coverage stands at a colossal 5.1 times, so next year’s figure of 2.4 times presents a more realistic picture. The widely-regarded security benchmark stands at 2 times or above, making Lloyds a supremely-protected pick in my opinion.
And shareholders should also take confidence that the bank’s still-rampant turnaround still has plenty left in the tank. Lloyds’ latest results showed underlying profit leap 32% during January-June to £3.8bn, with underlying income rising 4% to £9.2bn as the robust UK economic recovery helped to deliver growth in key customer segments.
Combined with the effect of ongoing streamlining — underlying costs fell a further 2% during the first half, while extensive divestments reduced its exposure to just eight countries and helped bolster the balance sheet — I believe that the firm is in terrific shape to deliver prolonged earnings and dividend growth.
