Could the 2022 Lloyds dividend boost the share price?

Could the 2022 Lloyds dividend lead to the bank’s share price increasing? Christopher Ruane reckons it could and plans to keep it in his portfolio.

| 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.

Typical street lined with terraced houses and parked cars

Image source: Getty Images

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.

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.

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.

Christopher Ruane 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.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »