Why Lloyds Banking Group plc is a great dividend stock for 2018

Paul Summers looks at investor favourite Lloyds Banking Group plc (LON:LLOY). Does a cheap valuation and monster yield make it a screaming buy?

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Shares in perennial retail investor favourite Lloyds Banking Group (LSE: LLOY) rose over 2% in early trading this morning as it reported an encouraging set of full-year figures to the market.

Here’s why I think the company remains attractive for those looking to generate a dependable income stream from their investments.

“Landmark year”

Having returned to private ownership and completed a restructuring of its business, 2017 was a “landmark year” for Lloyds, according to CEO António Horta-Osório. In addition to delivering on its second strategic plan (which included improving customer service and increased lending), the company finalised its acquisition of MBNA and confirmed that it would be purchasing Zurich’s workplace pensions and savings business. 

The numbers weren’t bad either. Lloyds grew statutory pre-tax profit to £5.3bn last year — 24% greater than in 2016 and the highest profit made by the FTSE 100 constituent since 2006. Underlying profit moved 8% higher to £8.5bn with net income rising 5% to £17.5bn.

While reflecting that 2017 had been positive for the company, Lloyds also used today to outline its strategy for the next three years. As a result of “changing customer behaviours” and “technological evolution“, the group announced that it would be investing over £3bn with the intention of transforming into a “digitised, simple, low-risk, customer-focused UK financial services provider“. 

As well as making banking easier for its customers, the company revealed plans to grow its financial planning and retirement business by increasing its open book assets to the tune of £50bn by 2020 and the addition of over 1m new pension customers. According to Lloyds, these developments will support profit growth and enable it to continue delivering strong returns for shareholders.  

All told, I’m really not surprised that today’s announcement appears to have been warmly received by the market, even if the bank failed to fully meet analyst expectations. 

Bumper yield

Of course, one of the biggest attractions to holding shares in Lloyds these days is its dividend yield.

Although payouts were cut completely in the aftermath of the financial crisis, it’s fair to say that these have been motoring ahead since being reinstated. Today’s confirmation of a 3.05p per share total dividend for 2017 represents a 20% improvement on the 2.55p per share returned in 2016. Positively, Lloyds also confirmed a buyback of “up to” £1bn, bringing the total capital return to £3.2bn. 

Looking ahead, these bumper payouts appear set to stay. Today’s release made reference to a “progressive and sustainable” dividend policy that also maintained “the flexibility to return surplus capital to shareholders“. So long as its recent performance can continue in 2018 and beyond, I wouldn’t be surprised if the company approved another special dividend in the not-too-distant future.

With a well-covered 6.8% forecast yield for the next financial year, simplified business model, relatively sound balance sheet and management’s ongoing commitment to cutting operating costs, I continue to believe that Lloyds is a good option for those keen to build a fully diversified, income-generating portfolio, even if the prevailing economic and political uncertainty appear to be restraining the share price. As interest rates begin to rise — thus benefitting financial entities like banks — the investment case can only get stronger.

Right now, stock in the £50bn cap trades on a forward price-to-earnings (P/E) ratio of just 9. For what investors will be getting in return, this remains a highly attractive valuation in my book.

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.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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