At the end of July, shares in Lloyds Banking Group (LSE:LLOY) broke through the 60p barrier for the first time since the pandemic. Since then, they’ve fallen back slightly. However, they remain (at 30 September) 23% higher than at the start of 2024.
Despite this good run, I suspect most people hold the stock for its generous dividend rather than in expectation of significant capital growth. So I’m going to look at the latest forecast to see what the stock might pay between now and 2026.
What returns might be on offer?
In respect of its year ended 31 December 2023 (FY23), the bank paid a dividend of 2.76p a share. Based on a current share price of 59.5p, this implies a yield of 4.6%.
With the FTSE 100 as a whole averaging 3.8%, it’s easy to see why the ‘black horse bank’ remains popular with income investors.
But the good news doesn’t stop there.
Its FY24 interim dividend was 15.2% higher than in FY23. If the final payout’s increased by the same amount, the yield rises to an even more impressive 5.3%.
In fact, analysts are expecting the bank to do better. The average of their predictions is for a FY24 total dividend of 3.26p, offering yield of 5.5%.
Looking further ahead, payouts of 3.44p (FY25) and 3.98p (FY26) are expected. If correct, a return of up to 6.7% (FY26) could be available.
And it would mean an increase in its payout of 99%, compared to FY21.
Is this forecast realistic?
However, forecasting dividends is more of an art than a science, especially for banking stocks where earnings can be volatile.
To meet these predictions, Lloyds must continue to grow. The bank consistently pays out around 45% of its earnings per share in dividends, so any drop in profits is likely to lead to a cut in its payout.
And I believe earnings will come under pressure as it looks as though we’re heading into a lower interest rate environment.
Also, with an estimated 18% share of the UK mortgage market, the bank is heavily exposed to the domestic economy. Virtually all of its profits are generated in this country. But the British economy is struggling to grow at the moment.
However, despite these concerns, the stock appears to offer good value. Its market cap of £36.5bn is around 20% lower than its book value at 30 June 2024, of £45.1bn.
It also trades at 8.9 times its estimated earnings for 2024. This is low by historical standards and comfortably below the FTSE 100 average.
The risk of bad loans also appears to have receded. For the first two quarters of 2024, it set aside £101m to cover losses, compared to £662m during the same period in 2023.
However, despite this — and the healthy dividend yield — I don’t want to invest at the moment.
That’s because with the country’s finances in such a dreadful state, I fear the government will see the banking sector as an easy target for raising additional tax receipts.
I suspect we’re likely to see some short-term share price volatility if a ‘windfall tax’ (or something similar) is imposed on the industry. I’m therefore going to wait until after the budget on 30 October, before revisiting the investment case
