It’s been a long time coming, but Lloyds (LSE: LLOY) (NYSE: LYG.US) has finally resumed the payment of a dividend. Of course, it’s been a long wait for investors in the part-nationalised bank, with the previous dividend having been paid six years ago. However, results released today by the UK-focused bank show that it is making encouraging progress and can easily afford to start paying dividends once more.
For example, Lloyds reported an underlying profit of £7.8bn for the 2014 financial year, which is up from the £6.2bn it posted in 2013. Furthermore, it is slightly ahead of market expectations, with an underlying profit of £7.5bn being priced in by investors prior to today’s release. This allows Lloyds to comfortably make a dividend payment of £535m (0.75p per share), with it intending to pay out at least 50% of its sustainable earnings in the coming years.
Of course, it’s not all good news for Lloyds. The underlying earnings strip out costs such as a further £2.2bn provision for compensation related to payment protection insurance (PPI), as well as £0.9bn in other regulatory items. However, in the case of the PPI provision, it is down on 2013’s £3.1bn and is likely to continue to fall over the medium to long term.
Looking ahead, Lloyds is maintaining its target of a cost:income ratio of just 45% by 2017, with its 2014 results showing that it is making excellent progress with regards to its cost base. In fact, total costs fell by 2% versus 2013 and, in addition, the bank’s asset quality ratio improved by 33 basis points to 0.24%. These numbers provide yet more evidence that Lloyds is delivering improved performance and is moving in the right direction.
Future Potential
While Lloyds’ dividend announced today equates to a yield of just 1%, it shows that the bank is making encouraging progress. This can be seen in how Lloyds’ underlying profit is growing and, with further cost savings to come and an improving UK economy causing demand for new loans to surge, its prospects for higher profitability and larger dividends seem to be very bright.
Despite its future potential, Lloyds continues to offer excellent value for money. For example, it trades on a price to earnings (P/E) ratio of just 9.8 and this indicates that its shares are cheap and could be due for a substantial upward rerating over the medium to long term.
Certainly, Lloyds’ turnaround is not yet complete and it continues to suffer from regulatory costs that hurt its reported results. However, its underlying performance remains strong and, with further rationalisation, cost savings and efficiency gains to come, its profitability is on course to continue to head northwards. As such, now seems to be a great time to buy a slice of Lloyds, with today’s dividend being a clear indication of how much its performance has improved in recent years.
