Despite the prospect of rising revenues pressures, the Square Mile’s army of analysts remain convinced that Lloyds Banking Group (LSE: LLOY) is one of the hottest dividend stocks out there.
The number crunchers do not have their heads buried in the sand, however, and current forecasts certainly factor in the prospect of fierce economic deceleration in the UK in the months ahead, not to mention the spectre of low interest rates continuing long into the future. Accordingly, current estimates suggest that Lloyds will endure earnings dips of 16% and 8% in 2016 and 2017 correspondingly.
Despite these issues, however, the strength of the bank’s balance sheet is expected to keep carrying rewards from the financial giant resolutely higher. A full-year reward of 3.1p per share is expected in 2016, creating a bumper yield of 5.3%. And 2017’s forecast 3.7p dividend propels the yield to a staggering 6.2%.
Tough Times
But Lloyds is under pressure from the Bank of England not to raise dividends following its decision to loosen the banking sector’s capital controls in July. Indeed, ‘The Old Lady of Threadneedle Street’ boosted the liquidity of Lloyds et al on the provision that “no banks increase dividends or distributions to shareholders.”
Whilst this is guidance rather than binding, there are a number of other factors that could also prohibit Lloyds from hiking the payout. Sure, the bank’s CET1 capital ratio clocked in at a splendid 14.1% as of September as the bank’s Simplification cost-cutting plan rolled on.
However, this figure looks likely to come under significant pressure as PPI-related penalties continue to climb. Lloyds is far and away the worst culprit on this issue, and an eye-watering £1bn extra provision for the third quarter means the bank has now set aside more than £17bn to date to cover claims.
When you also factor in the possibility of tanking revenues and rising bad loans, I believe Lloyds’ appetite to initiate hefty dividend hikes could be severely tested in the near future.
Shell Struggles
However, it could be argued that Lloyds’ dividend prospects are far more stable than those of fossil fuel goliath Royal Dutch Shell (LSE: RDSB).
Even if Lloyds were to heed the Bank of England’s July guidance and not raise the payout, a dividend in line with last year’s 2.25p per share reward still creates a chunky 3.8% yield. This reading beats the broader FTSE 100 average of 3.5% by a little distance.
It is true that Shell does not face industry pressure to rein in dividends. But signs that crude prices will fail to return to their previous heights casts a long shadow over the company’s earnings — and subsequently its dividend — outlook, even as the acquisition of BG Group looks set to blast group output through the roof.
Indeed, Shell chief executive Ben van Beurden cautioned this month that “lower oil prices continue to be a significant challenge across the business, and the outlook remains uncertain”.
Regardless of these pressures, the City expects Shell to keep the full-year dividend locked at 188 US cents per share in both 2016 and 2017. But while these figures create an impressive 7.4% dividend yield, income investors should note that these proposed dividends will continue to sail above predicted earnings through to the close of next year at least.
On top of this, Shell is grappling with a mounting debt pile that is seeing the company frantically scale back capex budgets and sell assets to soothe the balance sheet. Net debt ballooned to $77.8bn as of September.
As a result, I believe that Lloyds’ near-term dividend outlook is on safer footing that that of Shell. Having said that, given the likelihood that economic conditions in Britain will deteriorate in 2017 and probably beyond, I reckon the bank could also disappoint dividend chasers in the future.
