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?

| 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.

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.

More on Investing Articles

Investing Articles

Here’s how I’d aim for a ton of passive income from £20k in an ISA

To get the best passive income from an ISA, I think we need to balance risk with the potential rewards.…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

2 FTSE 100 stocks I’d buy as the blue-chip index hits record highs

This Fool takes a look at a pair of quality FTSE 100 stocks that appear well-positioned for future gains, despite…

Read more »

Satellite on planet background
Small-Cap Shares

Here’s why AIM stock Filtronic is up 44% today

The share price of AIM stock Filtronic has surged on the back of some big news in relation to its…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

At a record high, there can still be bargain FTSE 100 shares to buy!

The FTSE 100 closed at a new all-time high this week. Our writer explains why there might still be bargain…

Read more »

Asian man looking concerned while studying paperwork at his desk in an office
Investing Articles

After profits plunge 28%, should investors consider buying Lloyds shares?

Lloyds has seen its shares wobble following the release of its latest results. But is this a chance for investors…

Read more »

Abstract bull climbing indicators on stock chart
Investing Articles

Something’s changed in a good way for Reckitt in Q1, and the share price may be about to take off

With the Reckitt share price near 4,475p, is this a no-brainer stock? This long-time Fool takes a closer look at…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

This new boost in assets might just get the abrdn share price moving again

The abrdn share price has lost half its value in the past five years. But with investor confidence returning, are…

Read more »

Young Black man sat in front of laptop while wearing headphones
Investing Articles

As revenues rise 8%, is the Croda International share price set to bounce back?

The latest update from Croda International indicates that sales are starting to recover from the end of 2023, so is…

Read more »