It has been a rewarding time to be a shareholder in banking giant Lloyds (LSE: LLOY). Over the past year, the company’s shares have moved up 37%. Partly this investor enthusiasm is explained by expectations for growth in the Lloyds dividend. With the bank set to announce its full-year results on Thursday, could positive news about the dividend push the shares up still further?
Potential for the Lloyds dividend
In the pandemic, Lloyds and other British banks were forced to suspend dividends by their regulator. Last year, Lloyds brought its dividend back, but at a much lower level than before. Arguably that was due to an abundance of caution. But as a shareholder I feel it was a disappointing move.
Meanwhile, the company has continued to grow its pile of excess capital. Banks need a cushion of excess capital to help maintain their liquidity when the banking system faces heightened risks. But I am not a fan of banks sitting on substantial excess capital, as history is littered with examples of them frittering it away on poorly considered acquisitions. Instead, I prefer banks such as Lloyds to pay out excess capital to shareholders as dividends. The bank has stated that it has a progressive dividend policy, which means it hopes to keep increasing its payout. However, that is never guaranteed.
Lloyds results due
On Thursday, Lloyds is due to announce its full-year results to the City. Based on what we saw in the first three quarters, I expect a strong set of results. There are risks, though. The company’s huge mortgage book means its profits can be hurt by any downturn in the housing market. Inflationary pressures such as soaring energy costs could also increase the expected default rate among borrowers, hurting profits.
Among the other news, Lloyds will announce its proposed final dividend for 2021. Given its cash pile and trends in the sector, I am optimistic about this. Yesterday, for example, rival Natwest announced that it plans a final dividend of 7.5p per share, compared to 3p per share last year. If Lloyds increased its final dividend at the same rate, its yield would jump to 4%.
Will the Lloyds dividend increase?
However, we will not know until Thursday what Lloyds plans for its dividend. I feel it was cautious in restarting its dividend at the low level it did. So I am not expecting it to announce the sort of blockbuster increase we saw at Natwest. If it does, I would be happy as a shareholder – but I would see it as a welcome surprise.
Expectations of strong dividend growth are already built into the Lloyds share price in my view. That partly explains its surge over the past year. A meagre increase could actually lead the shares to fall, in my opinion. I think investors would be more welcoming of a sizeable increase. But, with expectations already high, I do not expect that to lead to a big jump in the Lloyds share price unless Thursday’s dividend news is really strong.
I continue to hold Lloyds. But I am not expecting this week’s dividend news to increase the value of my holding substantially. Instead, I am holding the shares for their continued long-term potential.
