What Dividend Hunters Need To Know About Lloyds Banking Group PLC

Today I am looking at whether Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) is an appealing pick for those seeking chunky dividend income.

On track for 2014 dividend resumption

Of course, the consequences of being bailed out by the UK taxpayer in October 2008 has meant that Lloyds has been unable to dish out shareholder payments ever since. But the company is aiming to start forking out dividends sooner rather than later, and chief executive António Horta-Osório noted in February that the board:

expects to apply to the regulator in the second half of the year to restart dividend payments at a modest level and to deliver LLOYprogressive and sustainable payments to shareholders thereafter.”

Convinced by such overtures, the City’s number crunchers expect the dividend conveyor belt to jolt back into life later this year, and expect a final payout of 1.5p per share to materialise for 2014. A full-year dividend of 3.3p is anticipated in 2015.

A partial payout this year translates into a 2.1% yield, although next year’s significant hike drives the readout to a not-inconsiderable 4.1%. This compares extremely well with a forward average of  3.2% for the complete FTSE 100.

Transformation package to keep payouts rolling

Income investors can take heart from forecasts which indicate that predicted payments — at least during the medium term — should be protected by strong earnings growth. Brokers expect Lloyds to bounce from losses of 1.2p per share in 2013 to earnings of 7.3p this year, with a 10% advance to 8p anticipated in 2015.

These projections provide the bank with chunky dividend coverage of 4.9 times predicted earnings in 2014, and although this drops to 2.4 times next year, this is still comfortably above the safety threshold of 2 times.

Lloyds’ post-bailout restructuring plan has seen the company significantly slash costs and hive-off a multitude of non-core assets to bolster the balance sheet, as well as invest in a multitude of new products and services in order to attract UK retail customers through the door. This approach helped underlying profit more than double last year, to £6.2bn, and the overhaul programme has plenty more left in the tank.

In the immediate term Lloyds’ dividend prospects lag those of the competition, as the business awaits official regulatory approval to begin doling out payouts to its investors once more. But beginning from next year, I expect the transformed bank to deliver increasingly appetising payout prospects, delivered in line with solid earnings growth.

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Royston does not own shares in Lloyds Banking Group.