There has been a lot of enthusiasm in the stock market recently for banking group Lloyds (LSE: LLOY). The company’s share price is 48% higher than it was a year ago, at the time of writing this article earlier today. Despite that, a lot of investors continue to see value in the Lloyds share price, which this week hit a new 12-month high. What currently excites me are the prospects for the 2022 Lloyds dividend. I think that may further help the share price. Here is why.
Large, profitable business
The foundation of any company’s dividends is the success or otherwise of its business. If a company generates large profits and free cash flow, it can fund a generous dividend.
That is not guaranteed, though: many businesses choose not to pay dividends. But Lloyds has committed itself to a dividend. Indeed, the bank has what it describes as a “progressive” dividend policy. In layman’s terms, that means that it aims to increase its dividend each year. Note again, though, that this is only an aim. A progressive dividend policy does not guarantee that dividends will increase.
For the first nine months of last year, the company reported post-tax profits of £5.0bn. I expect that the fourth-quarter results, due next month, will show continued strength. Lloyds is currently a very profitable money-making machine. That could be good news for shareholders.
Cautious dividend
But in fact the past several years have not been very rewarding for Lloyds shareholders in terms of dividends. First, the bank was forced by its regulator to suspend dividends after the start of the pandemic, in line with other British banks. Then, when it did reintroduce them, it paid out at a sharply reduced rate compared to previously. Last year’s interim dividend was 0.67p per share compared to 1.12p per share a couple of years previously. That is a 40% reduction in size.
That may be prudence on the part of the bank, as it continues to navigate an uncertain economic outlook. While last year saw strong performance, big risks remain. An economic downturn could eat into Lloyds’s revenues and profits. As it is the nation’s biggest mortgage lender, any weakening in customers’ ability to repay loans could badly damage profits.
2022 Lloyds dividend outlook
Meanwhile, the company has been stockpiling cash. Even after paying the dividends, its huge profits mean it has lots of spare money. That has pushed up its financial cushion, something known in banking terms as the CET1 ratio.
The company could pay a much bigger dividend but still comfortably stay at its target CET1 ratio level. Next month I expect it to announce a dividend raise alongside its final results, in line with its progressive policy. But I think the strong share price performance over the past year means that the City is already factoring in a dividend raise.
The question is how big the 2022 Lloyds dividend raise will be. If it restores the dividend to pre-pandemic levels, for example, I reckon there could still be substantial upside in the Lloyds share price even now. But a modest increase might disappoint shareholders and lead to a sell off. For now, I will continue to hold Lloyds shares in my portfolio. But I will be keeping a close eye on next month’s dividend news.
