2.8 Possible Reasons To Buy Lloyds Banking Group PLC

Today I am explaining why Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) could be considered a bountiful stock selection for dividend hunters.

Dividends back on the table

Lloyds cheered the market last month when it revealed it had finally received approval to start shelling out dividends again from the Prudential Regulatory Authority (PRA).

Although this move had been widely anticipated by the City, recent questions over the bank’s capital ratio caused some to speculate whether Lloyds would reconsider cranking its dividend machine back into life for 2014. The bank did not disappoint its shareholders, however, and elected to shell out a final dividend of 0.75p per share.

And with investor rewards now back on the agenda, the number crunchers expect Lloyds to provide a dividend bonanza in the coming years. A total payment of 2.8p is expected in the current 12-month period, creating a chunky yield of 3.5%. And the dividend anticipated to leap an extra 54% in fiscal 2016, to 4.3p, driving the yield to an impressive 5.2%.

… but can broker projections be considered realistic?

Lloyds seems to have finally put behind it the worst of the 2008/2009 economic crash behind it as the buoyant UK economic recovery has boosted activity across its retail operations, and the bank saw pre-tax profit leap to £1.76bn last year from £415m the previous year. Meanwhile the firm’s extensive cost-cutting and asset-shedding Simplification drive has also created a leaner, efficient earnings-generating machine for future years.

But still, investors should be aware that the fragile state of Lloyds’ capital pile could see current dividend projections miss their targets this year and next. Both the Bank of England and European Banking Authority highlighted the precarious state of the firm’s cash pile towards the back end of last year, with Lloyds scraping past the latter’s minimum CET1 ratio requirement of 5.5%, clocking in with a readout of 6.2%.

On top of this, Lloyds also faces a steadily rising legal bill related to a variety of previous misconduct issues which could put further pressure on the balance sheet and therefore future payouts — the bank was forced to stash away an extra £2.2bn in 2014 for the mis-selling of PPI, taking the total to more than £12bn, while it also took a £925m hit for other regulatory wrongdoings.

Even though Lloyds’s restructuring efforts over the past five years has left it in much ruder health than it was in the fallout of the global financial crisis, the bank still has a number of problems to overcome which could threaten dividend forecasts for the coming years.

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Royston Wild 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.