Lloyds Banking Group PLC Delivers On Dividend Promise: Time To Buy?

Shares in Lloyds Banking Group (LSE: LLOY) rose by almost 10% to 68p when markets opened this morning, after the bank announced a 2015 dividend of 2.75p per share.

The bank surprised investors when it announced a special dividend of 0.5p per share, on top of the expected ordinary dividend of 2.25p. The 2.75p total payout gives a healthy 4% yield at current prices.

The bumper dividend payout was not the only good news in today’s final results.

Lloyds said that underlying profit rose by 5% to £8.1bn and that the bank’s net interest margin, a key measure of profitability, rose from 2.4% to 2.63% in 2015. Underlying earnings per share were 8.5p, slightly ahead of forecasts of 8.27p.

In my view, today’s results confirmed Lloyds’ position as one of the most profitable and well-financed of all the big UK banks. Lloyds’ CET1 ratio of capital strength rose from 12.8% to 13% last year, while its underlying return on equity rose from 13.6% to 15%. These are very solid figures.

UK focus pays off

One reason for Lloyds’ strong performance is its simple UK-only banking model. The group doesn’t have an investment bank, nor does it operate overseas. This helps to keep costs down.

In 2015, Lloyds’ costs only accounted for 49.3% of the bank’s income. By contrast, Barclays reported a cost-to-income ratio of 65% for the first nine months of last year. It’s much harder to make a decent profit when your costs are so high.

Was there any bad news?

Lloyds said this morning that it would allocate a further £2.1bn to PPI claims. This takes the 2015 total to £4bn, and means the bank has now spent a total of £16bn on PPI compensation.

The bank believes that the proposed deadline for PPI compensation could cause a surge in claims, hence today’s increase. However, Lloyds believes the allocations made in 2015 will be enough to cover all remaining PPI claims.

This news overshadowed the much better news on bad debts. Lloyds said that bad debt charges fell by 48% to £568m last year, reflecting an improvement in loan quality.

What next for Lloyds?

Last year’s government share sales saw the taxpayer’s stake in the bank fall to 9%. Sales were suspended when the share price fell below the government’s break-even level of 73.6p. This left the market uncertain about whether the planned discounted offering for private investors is still likely to go ahead.

Shares in Lloyds have risen by 22% over the last two weeks, but will still need to rise by at least another 8% before the Treasury will give the green light for further sales.

Should you buy?

Personally, I wouldn’t wait to buy in the hope that the government’s promised discounted offering will go ahead. I don’t see the logic in waiting — not least because in the meantime, you may be missing out on dividend income and potential capital gains.

I’d argue that Lloyds is a solid buy on the back of today’s results. Although profits are expected to fall slightly in 2016, the shares trade on just nine times 2016 forecast profits and offer a forecast 2016 yield of 5.4%. Both figures seem attractive to me.

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Roland Head owns shares of Barclays. 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.