The Lloyds Banking Group (LSE: LLOY) share price has dropped 16% so far this year. This means that current dividend forecasts leave the bank with a large 5.9% dividend yield for 2022.
This is some distance above the 4% forward average for FTSE 100 shares. And things get even better for next year. For then Lloyds shares carry a 6.5% yield.
As a UK share investor seeking passive income, these figures look very attractive to me. But are they enough to encourage me to invest? And how secure do current dividend forecasts look?
Dividend cover
Of course, broker estimates are just opinion. They can change over time. And actual dividends can come in below, or above, what the City thinks.
In the case of Lloyds shares however, I think current dividend forecasts look quite realistic. That’s at least when you consider earnings predictions for the next two years.
City analysts are expecting dividend payments of 2.44p and 2.69p per share for 2022 and 2023 respectively. Meanwhile, earnings per share are estimated at 7.11p and 6.9p for these corresponding years.
As a consequence, dividend coverage ranges 2.9 times and 2.6 times for the next two years. Any reading of 2 times is considered to offer a wide margin of safety.
Balance sheet boost
The strength of the balance sheet gives current dividend predictions extra credibility too. Even if earnings disappoint, the bank’s healthy capital position could help it make brokers’ dividend forecasts. It also had a CET1 capital ratio of 15% as of the end of September. This is well above the company’s 12.5% target.
Lloyds is also harvesting heaps of cash. In fact, last week, it upgraded its 2022 cash generation forecasts by 225 basis points to 250 points. This is up significantly from its previous estimate of 150 basis points.
Troubling times
So do I trust the dividends forecasts? Well, in spite of the above information, I’m not convinced.
More specifically, I think the bank will meet 2022’s dividend expectations. But the darkening UK economy leaves a big question over dividend levels next year and beyond.
Banks’ operations are highly sensitive to broader economic conditions. And, last week, the Bank of England painted a bleak picture for the sector through the medium term, at least.
Threadneedle Street has predicted a “prolonged recession” that will last until mid-2024. In this landscape, Lloyds — which has already set aside more than £1bn in bad loan provisions this year — could face an avalanche in loan impairments. It can also expect weak revenues in a further blow to profits growth.
Looking past Lloyds shares
On the plus side, interest rates could continue rising to tame protracted inflationary pressure. The higher the rate raises means the difference between the rates it offers borrowers and savers boosts profits in the process.
But, all things considered, I think earnings forecasts for 2023 are looking increasingly fragile. And, as a consequence, I think Lloyds’ dividend for next year could come in below forecast.
There’s also a high chance the share price will keep slumping next year, and even beyond. This is another reason why I’d rather buy other dividend shares today.
