2 Reasons To Steer Clear Of Lloyds Banking Group PLC

In recent days I have looked at why I believe Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) is poised to hit the high notes (the original article can be viewed here).

But, of course, the world of investing is never black-and-white business — it take a confluence of views to make a market, and the actual stock price is the only indisputable factor therein. With this in mind I have laid out the key factors that could, in fact, seriously dent Lloyds Banking Group’s investment appeal.

Fresh courtroom clashes loom

Lloyds continues to suffer heavily from a multitude of mispractice scandals dating back several years. The bank announced during February’s full-year results that it had raised provisions for legacy issues by a further £200m in 2013, and although the number of claims for the mis-selling of payment protection insurance (PPI) is falling, the firm still faces heavy penalties for other items.

Indeed, Lloyds has also been forced to raise provisions related to the wrongful sale of interest rate hedging products. And last week it was announced that US regulators were taking action against Lloyds, along with 15 other institutions across the globe, for the fixing of Libor between 2007 and 2011. With legal issues likely to rumble onwards for some time to come, what the final bill is likely to register at is anyone’s guess.

LLOYPayout prospects lag the competition

Of course, Lloyds has not rewarded its shareholders with dividends since its rescue by the UK government following the 2008/2009 financial crash. So news last month that the bank will apply to recommence payments during the second half of the year confirmed to many what was already on the cards.

Indeed, broker Investec expects these discussions to yield a maiden 1.5p per share dividend for 2014, before doubling up to around 3p in the following 12-month period. These projections produce full-year yields of 1.9% and 3.8% respectively. However, for many dividend hunters these figures fail to cut the mustard.

By comparison, fellow UK-listed bank Barclays offers much better yields over the next couple of years, boasting figures of 4.1% for this year and 5.6% for 2015. And HSBC Holdings carries yields of 5.4% and 5.9% for 2014 and 2015 respectively.

Of course, Lloyds has to start somewhere, but as an investor looking for chunky returns in the more immediate term the bank may not be the best selection. Indeed, Lloyds still has to receive the green light from authorities over when it can begin forking out dividends. In my opinion more robust income picks can currently be found elsewhere.

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Royston does not own shares in any of the companies mentioned in this article.