The fiscal year for Lloyds (LSE:LLOY) ended in December 2021, and with it came a final dividend of 1.33p per share. This brought the full-year dividend to 2p. That may not seem like much, but compared to the current share price, this represents an attractive yield of 4.5%.
However, this is actually around half of the pre-pandemic levels. And that’s got me wondering. With Covid-19 slowly having less of an impact on the business, is the payout set for an explosive jump over the next 12 months? Let’s take a closer look at what could happen to Lloyds’ dividends in 2022.
The bull case
Inflation has been in the headlines for a while now. And, as expected, it’s having quite an impact on consumers. So much so that the consumer confidence index is near its lowest point since the pandemic first started. At the end of February, UK inflation stood at 6.2% – the highest since 1992.
With the Bank of England shifting its monetary policy to tackle the surging inflation, interest rates are rising. In other words, the cost of borrowing money is going up. Once again, this sucks for consumers and debt-burdened businesses.
But in the case of Lloyds, the situation is quite the opposite. Why? Because higher interest rates mean the profit margins on the bank’s lending activities could be about to rise.
Wider margins mean more profits. And higher profits mean there’s more money available for Lloyds to pay shareholders a larger dividend. What’s more, management recently announced a £2bn share buyback programme. Therefore, I think it’s fair to say the group is confident about its future outlook. But this isn’t a foregone conclusion.
The Lloyds dividend might actually fall
Rising interest rates are a positive for Lloyds, its share price and dividend. However, to reap the benefit, it requires its debtors to pay. And this is where a problem might emerge.
In 2021, the bank had around £450bn worth of loans on its books. This is the money lent out to customers to fund large purchases or operations. However, around £300bn of this is mortgages. Why is this a problem?
As mentioned, consumers are hit hardest by surging inflation. And it would appear this is the primary customer for Lloyds lending products. With energy bills soaring, food prices constantly rising, and fuel costs for vehicles doing the same, the risk of late mortgage payments, and even defaults, is growing.
Consequently, even if lending margins are expanding, it’s ultimately meaningless if customers can’t afford to pay. And while this could spark some short-term lending boosts, as consumers become reliant on credit cards, this creates an even bigger problem over the long term.
We’ve already seen what a surge in loan impairments means for Lloyds’ dividend back in 2020. And suppose a similar situation were to arise now? Shareholder payouts could be cut or even suspended.
The bottom line
The Lloyds dividend seems to be in an interesting spot. Inflation does open the door to a larger stream of passive income for my portfolio. However, it’s simultaneously brewing a potential catastrophe for this business.
At this stage, I think both scenarios have a relatively equal probability of occurring. And since I don’t like making coinflip investments, I’m going to look for other income opportunities.
