The 2022 Lloyds (LSE: LLOY) dividend is not due to be paid until the end of May. So it may seem a bit early to be thinking about the 2023 Lloyds dividend. But some elements of the bank’s investment case seem to be changing. I am trying to figure out if that is good or bad news for the future dividend.
2022 Lloyds dividend disappointment
Back in 2020, the banking regulator ordered Lloyds, along with its peers, to stop paying dividends. It restarted them last year. But the bank has been paying out at a markedly lower level than before. Its recently announced annual dividend of 2p per share is only 62% of its 2018 dividend level (I use 2018 as a baseline because the payout for the 2019 financial year was ultimately affected by the pandemic). Rival bank Barclays is now paying out 92% of its 2018 dividend level, Natwest 81%, and HSBC 49%.
So, none of the big four UK banks have restored their dividends to their pre-pandemic levels yet. But Barclays and Natwest are both far ahead of Lloyds in restoring dividends to their old level. What was particularly galling about Lloyds’ disappointing dividend increase is that it also announced a £2bn share buyback programme. That £2bn could have funded an extra 6.5p dividend per share, instead of the share buyback programme.
So Lloyds seems to be in no hurry even to get dividends back to where they were before the pandemic. As a shareholder I see that as inexcusable. Its business has recovered – post-tax profits last year of £5.9bn were close to double the pre-pandemic 2019 level of £3.0bn. The tardy pace of restoring the dividend comes despite a massive increase in earnings that could comfortably have funded it. It seems that dividend restoration to pre-pandemic levels is simply not a priority for the board, which alarms me as a Lloyds shareholder.
Business strategy
Lloyds released its results on the day Russia invaded Ukraine, which also weighed heavily on the share price. Nonetheless, an 11% fall suggests the City was underwhelmed despite the bumper earnings. I do not think the rate of dividend increase was the only concern.
I think investors also took fright at Lloyds unveiling its new “clear strategic vision to be a UK customer-focused digital leader and integrated financial services provider, capitalising on new opportunities, at scale”. Lloyds has been down this road of branching into new businesses before, with mixed results. A misstep “at scale” could mean a big hit to profits.
Muted expectations for the 2023 Lloyds dividend
I have seen the investment case for Lloyds as being its UK focus on retail and business banking, which allows for a generous dividend. The share price fall since the results means the shares now yield 4.7%. That is attractive to me and for now I continue to hold the shares.
But I am concerned. The bank’s lukewarm enthusiasm for substantially higher dividends makes me wonder if the 2023 Lloyds dividend will see meaningful growth. The new business strategy could improve profits, but I see a clear risk that it might end up doing the opposite. I fear the bank may squander excess cash that could fund dividends by moving into areas where it lacks a clear competitive advantage. Any big fall in profits could lead to a dividend cut down the line.
