Today I am looking at why Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) may not be a fiery payout pick after all.
Dividend resumption targeted for 2014
Lloyds Banking Group has, of course, failed to fork out a dividend since the 2008/2009 financial crisis smashed earnings and forced it into a humiliating taxpayer bailout. Since then a backcloth of balance sheet strengthening and rejuvenated retail operations have raised expectations that the firm will begin rewarding shareholders with bumper payouts once more.
Indeed, Lloyds itself announced in this week’s interims that discussions with the Prudential Regulatory Authority (PRA) over when it can get dividends rolling again are “ongoing.” But as we enter the dying embers of 2014 and investors patiently await news on this front, should investors be readying themselves for disappointment?
City analysts certainly don’t think so, with the bank anticipated to pay a final dividend of 1.2p per share for this year, producing a yield of 1.5%. And with the payout policy up and running again a full-year reward of 3.1p is currently chalked in, resulting in a delicious 4.1% yield.
… but balance sheet questions undermine payout potential
Still, there are a number of issues still facing Lloyds which could undermine these forecasts. Firstly the bank barely scraped past the European Central Bank’s common equity tier 1 (CET1) capital ratio test at the weekend, with a reading of 6.2% just beating the target of 5.5%.
The bank still has to face the Bank of England’s own exams in December of course, and should fears of balance sheet flimsiness emerge once again the bank may be forced to hold extra cash on its books at the expense of shareholder payouts.
On top of this, Lloyds is also facing numerous legal legacy issues which threaten to crimp the bottom line. The bank’s interims revealed an unexpected hike in its provision for the mis-selling of payment protection insurance (PPI) by £900m during the third quarter, a result which drove pre-tax profit 5% lower — to £1.6bn — for January-September.
So far Lloyds has had to stash away £11.3bn to cover the cost of the dragging PPI scandal, but the problems do not end there: the bank also faces huge costs associated with the wrongful sale of interest rate protection products, and many commentators have noted that the final bill here could even exceed that of the PPI problem.
Undoubtedly Lloyds’ attempts to pull itself up by its bootstraps following its humiliating taxpayer bailout are to commended. Its successful approach to the High Street, combined with ongoing restructuring work — indeed, the bank announced plans to cut another 9,000 posts and shutter 200 branches — should enhance earnings in the long-term.
But in my opinion shareholders should be prepared that forecasts for smashing near-term dividend yields may fail to ignite.
