Before releasing its latest earnings update Wednesday (23 October), the dividend forecast for Lloyds Banking Group (LSE:LLOY) was predicting a payout in 2024 of 3.09p. Looking further ahead, analysts are expecting this to increase to 3.32p (2025) and 3.69p (2026).
Of course, dividends are never guaranteed. And predictions must always be treated with caution.
However, if these estimates are correct, the shares are presently offering a yield greater than the FTSE 100 average of 3.8%.
And this is expected to steadily increase until — at least — 2026.
| Year | Forecast dividend per share | Forecast dividend growth | Implied yield |
|---|---|---|---|
| 2024 | 3.09p | 12.0% | 4.9% |
| 2025 | 3.32p | 7.4% | 5.3% |
| 2026 | 3.69p | 11.1% | 5.9% |
What are the results showing?
Investors reacted positively to the bank’s Q3 2024 results.
Its net income, profit after tax and net interest margin all beat analysts’ expectations. However, the latter did fall by 13 basis points, compared to the same period in 2023. This is likely to come under further pressure if the Bank of England (as expected) continues to cut interest rates.
Encouragingly, the amount set aside to cover possible bad loans fell slightly.
Earnings per share increased to 5.9p for the first nine months of 2024 — 15.7% ahead of analysts’ expectations.
Will the numbers affect the dividend?
In my opinion, I don’t think the results are going to materially alter the dividend forecast highlighted above.
Yes, the bank pays out less than half its earnings in dividends. This suggests there’s plenty of headroom to increase returns to shareholders. But like so many FTSE 100 companies, the bank appears to prefer ‘rewarding’ its owners through share buybacks.
Personally, I’d rather have the cash in my hand.
Should I buy?
I have long believed that Lloyds is a solid business. Indeed, I used to be one of its estimated 2.2m shareholders.
But as much as I appreciated its generous dividends, I became increasingly frustrated with the lack of share price growth.
And although it’s increased by nearly 50%, since October 2023, it’s still below its pre-pandemic level.
But I don’t see how this impressive run is going to be sustained.
With nearly all of its income coming from the UK, it’s exposed to the performance of the domestic economy, which is struggling to grow.
In turn, this lack of growth is impacting the nation’s finances, which are in a bit of a mess.
With the Chancellor looking to fill a ‘black hole’, I’m expecting banks to be a target when she delivers her budget on 30 October.
I wouldn’t be surprised to see a windfall tax or other form of levy on the sector. There’s also talk she’ll instruct the Bank of England to stop paying interest on the deposits it holds on behalf of the UK’s financial institutions.
This will impact Lloyds’ income and margin and could damage investor sentiment.
And with today’s results including profit after tax for the first nine months of £3.77bn — comfortably ahead of analysts’ expectations of £3.63bn — this could be the justification that the Chancellor’s looking for.
Some will point to the attractive yield and low price-to-earnings ratio as evidence that now could be a good time to invest.
But this is the same for all the Footsie’s banks, which suggests investors view the sector with caution. I agree with them and — despite Lloyds’ impressive results — I believe there are better opportunities elsewhere.
