Will Lloyds Banking Group PLC Really Resume Paying Dividends?

It wasn’t that long ago that the idea of dividends from Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) would have raised nothing but sniggers.

But with the bank bouncing back to profit and the first sale of TSB Banking Group shares having gone well, we really are expecting Lloyds to start flashing the cash again — and we should hopefully be seeing the first pennies paid to shareholders this year.

Second half dividend

LloydsThere won’t be any interim handout, but with its 2013 results Lloyds told us that “We also expect to apply to the regulator in the second half of the year to restart dividend payments at a modest level and to deliver progressive and sustainable payments to shareholders thereafter“.

The company hasn’t specified any actual amounts, but the City’s pundits are predicting 1.45p per share for the year, and that would provide a 1.9% yield on today’s 74.2p share price. And so far, they have around 3.3p penciled in for next year to yield 4.4%.

The question is, will Lloyds be able to satisfy regulators that it’ll be able to afford to hand out the cash without leaving its capital reserves at risk — after all, retaining sufficient cash to minimize future risk has been the order of the say since the crash, not reducing cash piles by giving it back to shareholders.

Satisfying the regulators

It will be down to the Prudential Regulation Authority (PRA) to decide, and it’s all going to be about capital ratios. It’s expected that the PRA will be looking for a Tier 1 capital ratio of at least 11% before it gives the nod for both Lloyds and fellow bailed-out sufferer Royal Bank of Scotland to resume payments.

And on that score, Lloyds is looking good. It reported a core tier 1 ratio of 14% for the year ended December 2013, up from 12% a year previously. The bank’s loan to deposit ratio improved from 121% to to 113% too, and that’s after a 3% rise in core lending.

Time to get in?

In the medium term, Lloyds said it plans to “move to a dividend payout ratio of at least 50% of sustainable earnings“, and that’s certainly looking believable to me.

With Lloyds shares trading in a forward P/E of just over 10, dropping to 9.4 based on 2015 forecasts, now could turn out to be a very good time to get in for a long-term future of strong and rising dividends.

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Alan does not own any shares in Lloyds or RBS.