The question over when, and to what extent, part-nationalised Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) will begin shelling out dividends again has been one of the stock market’s biggest questions for more than a year now.
The City’s army of number crunchers, however, seem to be in broad agreement that the bank will get the approval of the Prudential Regulation Authority (PRA) in the coming weeks to shell out rewards sooner rather than later, and anticipate a final dividend of 1.1p per share for the year concluding December 2014.
Following this resurrection of the bank’s payout policy, Lloyds is anticipated to shell out payments totalling 2.9p in 2015, in turn creating a bumper yield of 3.8%. But the story does not end there, with current forecasts indicating an extra 48% rise in 2016, to 4.3p. As a consequence the bank’s yield leaps to a market-busting 5.9%!
Strong earnings outlook bolsters payout prospects
Lloyds has pulled out all the stops in recent years to return to earnings growth, the firm having failed to turn a profit since the 2008/2009 financial crisis gutted the bottom line. And the bank is expected to snap from losses of 1.2p per share to earnings of 7.9p in 2014.
Further solid growth is expected in 2015 and 2016 — by 4% and 5% correspondingly — thus underpinning a solid upshift in the dividend during the period, or say so City analysts.
Under chief executive António Horta Osório, Lloyds has embarked on an ambitious restructuring exercise to strip out unnecessary costs, and announced in October the shuttering of a further 200 branches as it slashes costs and moves further towards the sphere of online banking.
On top of this, Lloyds is also enjoying the fruits of a spritely British economic recovery, its refreshed approach to the UK high street clearly paying off handsomely. And the firm is rolling out a number of initiatives to keep the punters piling in through the door, from its longest ever interest-free balance transfer credit cards introduced last week through to offering a £500 cashback incentive to mortgage switchers.
But beware of the capital concerns
However, there are a number of obstacles Lloyds still has to overcome to meet these dividend projections, first and foremost being its precarious cash pile. Both the European Banking Authority and Bank of England have cast doubt over the strength of the company’s capital ratio should the economic recovery take a dive, a scenario which could not only jeopardise dividend levels through to the end of 2016, but prompt the PRA to put the kibosh on Lloyds’ plans in the coming months.
And Lloyds’ balance sheet is in danger of experiencing further pressure through the mounting levels of compensation it is having to fork out over previous misconduct. The firm has stashed away billions to cover the mis-selling of PPI and interest rate swaps, and more recently faces being dragged through the courts by a band of investors claiming Lloyds published misleading information over the health of HBOS prior to the 2008 takeover.
