Are Forecasts For Lloyds Banking Group PLC Worthless?

LloydsA year ago, analysts were predicting a 2014 dividend of 2.26p per share from Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US), but that’s looking like a pipe-dream now. Since then, the consensus has been slashed to less than half that, at 1.07p per share, and it’s looking increasingly unlikely that shareholders will see even that.

Stressed out

Lloyds performed badly in the latest European stress tests. It passed, but only just, with the weakest results of any of the UK banks. And with Bank of England tests still to come, the likelihood that the Prudential Regulation Authority will give the nod to a second-half cash handout from Lloyds is diminishing.

To make things worse, the bank has also been hit by more charges related to compensation for the mis-selling of payment protection insurance. This time it’s an additional £900m, taking Lloyds’ total bill to a staggering £11.3 billion! On top of that, the chances of a further hit next year of around the same level are looking high, and Lloyds has said it can’t rule out further charges.

It’s a tough job

It’s hard to blame analysts for having been a little optimistic in their dividend forecasts. And, in fact, forecasts for earnings per share are actually on the rise — from a prediction a year ago of 6.8p per share, the consensus has been beefed up to 7.8p (with 8.2p tentatively suggested for 2015). The consensus on revenue has been largely unchanged over the year, but that is the least difficult to predict.

Getting it wrong is nothing new. At the height of the crisis just before the publication of full-year results for 2009, the consensus wasn’t far away from Lloyds combined business loss of £6.3bn for the year. But at that stage the analysts were way out with their forecasts for an underlying loss of about £1.5bn in 2010 — as it turned out, Lloyds recorded an underlying combined business profit of £2.2bn (with a statutory pre-tax profit of £281m).

What do we learn from all of this?

Well, not that forecasts are completely useless, but that we do need to understand just how wide of the mark they can be, especially at this stage in Lloyds’ recovery.

And we shouldn’t conclude that Lloyds is no good as an investment either — the hoped-for dividend this year was really only symbolic, and I reckon that at 76.5p the shares are an attractive proposition. We have 18 forecasters saying we should Buy Lloyds shares against just four urging us to Sell — and I think they got that one right.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.