Lloyds Banking Group plc is forecast to raise its dividend by 35% in 2018

Edward Sheldon looks at the 2018/19 dividend forecasts for Lloyds Banking Group plc (LON: LLOY). Can investors rely on analysts’ estimates?

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In February, Lloyds Banking Group (LSE: LLOY) announced its full-year results for 2017. In what was described as a “landmark year” by CEO Antonio Horta-Osorio, the FTSE 100 bank enjoyed a “strong financial performance” with underlying profit rising 8%. Importantly for income investors, Lloyds raised its dividend payout for FY2017 by an impressive 20%, to 3.05p per share. At today’s share price, that’s a very respectable yield of 4.5%.

That now marks three consecutive dividend increases since Lloyds resumed its distribution in FY2014 with a 0.75p per share payout. In that time, the dividend has grown over 300%. So, can Lloyds keep growing its payout in the future? Let’s take a look at City analysts’ dividend forecasts for 2018 and 2019.

2018 / 2019 dividend forecasts

According to Stockopedia, analysts currently estimate that Lloyds will pay a dividend of 4.11p per share for FY2018. That would be a 35% increase on 2017’s dividend and equate to a yield of a high 6.1% at the current share price. Earnings of 7.41p per share are expected, giving a dividend coverage ratio of 1.8 times.

Looking further out to FY2019, analysts currently forecast a dividend payout of 4.27p per share. That’s a yield of 6.4% at the current share price. Earnings of 7.42p per share are expected, giving a coverage ratio of 1.7 times.

Can investors bank on these high dividend payouts?

Caution advised

Well, after Lloyds’ recent results I’d say it’s worth approaching these dividend estimates with an element of caution. Don’t get me wrong – I think it’s highly likely Lloyds will increase its payout in coming years, but the thing to remember about analysts’ forecasts is that sometimes they can be quite inaccurate.

The reason I say this, is that for Lloyds’ 2017 dividend analysts were forecasting a payout of around 4.1p per share as little as a month ago. However instead, Lloyds paid a dividend of 3.05p per share and also announced a £1bn share buyback, equivalent of up to 1.4p per share. So while the total capital return was 4.45p, investors received a cash payout that was significantly lower than analysts had anticipated. The consensus forecast figure was quite some way off the mark.

One takeaway here is that if a company has a short dividend track record, it can make the process of forecasting future payouts a little harder. In Lloyds’ case, with a track record of just three dividends to work with (0.75p, 2.25p and 2.55p per share declared over the last three years, plus two special dividends), it was always going to be a challenge for analysts to accurately forecast the payout for 2017.

Progressive policy 

With Lloyds making reference to its “progressive and sustainable” dividend policy, and increasing its payout by 20% for 2017, I think the bank has the potential to reward income investors with attractive dividend growth in coming years. However, until Lloyds can display a longer dividend-growth track record, investors should be aware that there is the potential for analysts’ forecasts to be inaccurate.

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.

Edward Sheldon owns shares in Lloyds Banking Group. 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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