I previewed Lloyds’ (LSE: LLOY) annual results in my last column, after the bank published updated analyst consensus forecasts.
With the results now in, let’s have a look at how the numbers measured up against the forecasts and how the market reacted. Also, at the current valuation of the stock and the outlook for 2022 and beyond.
Market reaction
Lloyds was the last of the big five FTSE 100 banks to report. And its results happened to coincide with Russia’s full-scale invasion of Ukraine.
World stock markets plunged on the day. The Footsie closed 3.9% down — its biggest one-day fall since June 2020. However, I think we can separate out the market’s reaction to Lloyds’ results from the general malaise on the day.
All five Footsie bank stocks tumbled but Lloyds was the worst performer of the lot, plummeting 10.8%. Almost double the drop of its fellow UK-focused bank, Natwest (-5.5%).
This suggests to me the market was disappointed by Lloyds’ results.
Results vs forecasts
Lloyds’ net income of £15.8bn came in ahead of a consensus forecast of £15.5bn. However, while operating costs were broadly in line, a number of other costs were materially higher than forecast.
Remediation charges — including a hefty hit relating to historical fraud at HBOS Reading — were £622m higher than consensus, restructuring costs £332m higher, and volatility and other items £179m higher. These were only partially offset by an impairment credit of £537m above consensus.
The upshot was that Lloyds’ profit before tax of £6.9bn was over 4% below market expectations. And with a higher taxation charge than analysts had forecast, bottom-line profit of £5.9bn and earnings per share (EPS) of 7.5p missed consensus by over 7%.
The 10.8% drop in Lloyds’ share price would seem to make sense — the EPS miss accounting for around 7% and the general market sell-off around 4%.
Dividends and share buybacks
In addition to earnings, the market was keenly awaiting news on Lloyds’ dividend. Not only the ordinary dividend, but also how much of its substantial excess capital it would distribute by way of a special dividend and/or a share buyback programme.
The consensus was that the ordinary dividend for the year would be 2.07p a share (about £1.5bn gross) with an additional distribution of around £1.4bn of excess cash. The majority of analysts expected this to be via share buybacks rather than a special dividend.
In the event, the board announced a 2p-per-share ordinary dividend and a buyback programme of up to £2bn.
I’ve no objection to buybacks, because they give loyal long-term shareholders a larger stake in the business, and a bigger cut of future dividend pots down the line. However, I can understand why investors who own Lloyds for a cash income stream may have preferred a special dividend. A bird in the hand is worth two in the bush and all that.
Valuation
Ahead of the results — with the share price at 52p and based on the consensus forecasts — I thought Lloyds may have investment appeal. I saw three measures pointing to good value.
The price-to-earnings (P/E) ratio was just 6.4, the dividend yield was a sector-leading 4%, and the price-to-tangible net asset value (P/TNAV) was a discount 0.92.
Based on the actual results, and with the share price below 48p as I’m writing, the metrics now read: P/E 6.3, dividend yield 4.2% and P/TNAV 0.83. Viewed on these measures, the UK’s bellwether bank has become even better value since the results.
Looking ahead
On past form, Lloyds will compile and publish updated analyst consensus forecasts for 2022-25 ahead of its Q1 results scheduled for 27 April.
These forecasts should be particularly interesting, because the bank’s chief executive, Charlie Nunn (who took charge in August), laid out an ambitious new strategy for growth alongside the recent results. The strategy will be supported by incremental investment of £3bn over the next three years, and a total of £4bn over five years.
The planned investment for growth, the somewhat lower 2021 ordinary dividend than forecast, and the board’s preference for a share buyback programme over a special dividend, suggest to me that Lloyds’ cash distributions over the next few years may not be quite as ‘progressive’ as the market was previously anticipating.
Having said that, a 4.2% yield on the ordinary dividend with potential for reasonable annual increases (UK economy permitting) wouldn’t be too shabby, in my book. One for my watch list…
