Lloyds Banking Group (LSE: LLOY) shares are popular with income investors. A well-known ISA provider frequently has Lloyds at the top of its most-searched stock list. Lloyds is already well covered here at the Fool, but I think it’s about time I had a look at what the fuss is all about.
Paying dividends
Income investors like Lloyds for its dividends. That’s not surprising considering the trailing dividend yield is around 7%. But is the Lloyds dividend yield safe?
Well, it’s high, but not absurdly high, and earnings have been growing faster than dividends, which is good. Lloyds is itself a large market capitalisation company, and its balance sheet looks acceptable. Dividend cover is above 1, which is also acceptable, but not great. I would say its dividends look fairly safe.
Lloyds looks like the best dividend bet for British banks. It is top of the class for earnings per share (EPS) growth and volatility. Although second-best for dividend growth, it has not cut its dividend in the last five years as others have. It does have a relatively weak dividend cover metric, but it will be stable in comparison because of the low earnings volatility.
| EPS growth over 5 years | EPS volatility over 5 years | Dividend growth over 5 years | Dividend cover | Dividend cuts in last 5 years | Maintained dividends in last 5 years | |
| HSBC | -17.6% | 24.4% | 0% | 0.59 | 0 | 5 |
| Lloyds | 44.6% | 1.18% | 5.21% | 1.04 | 0 | 1 |
| Barclays | n/a | 10.2% | 8.5% | 1.59 | 1 | 1 |
| RBS | n/a | 33.7% | n/a | 1.18 | n/a | n/a |
Just a note on the table above: both Barclays and RBS started the five-year period with a loss, hence an EPS growth rate is meaningless. RBS cancelled its dividend entirely from 2008 until 2018 so does not lend itself well to counting maintained and cut dividends over the last five years. Dividends have gone nowhere for HSBC, and it has just begun a huge restructuring.
Read the small print
Looking at EPS and dividends can give a good overview of a company. Lloyds however, is a bank. The banking industry is heavily regulated and has its nuances.
Here is a tip. When looking at a company in a complicated industry, find out what analysts are asking management in earnings calls. You will be able to find transcripts or the audio of these calls on the company website, in the investor section. Do this for several companies in the industry, and you will identify the essential themes.
| Net income margin | Return on tangible equity | Leverage | RWA/AIEA | |
| HSBC | 1.56% | 8.4% | 5.3% | 0.44 |
| Lloyds | 2.88% | 14.8% | 5.2% | 0.47 |
| Barclays | 3.09% | 9% | 5.1% | could not compute |
| RBS | 1.6% | 9.4% | 4.9% | 0.43 |
With reference to the table above, Lloyds is more profitable for its shareholders than the other banks, as measured by return on tangible equity, and has average leverage.
Lloyds is generating higher net income margin than RBS or HSBC and appears to be doing it with less risky assets. A higher ratio of risk-weighted assets (RWA) to average interest-earning assets (AIEA) tells me that less risky assets are being used. Lloyds has the highest ratio. I could not find the AEIA number for Barclays.
Banking on it
I can understand why income investors like Lloyds. However, the economy is jittery right now, rate cuts are likely, and that does not bode well for banks. But with annual declared dividends of 3.37p, Lloyds could slash its dividend by 43% to 1.92p, and an investor would still get a 4% yield on the current share price of 48p. That is a bankable margin of safety.
