Will Lloyds Banking Group plc announce another special dividend this year?

Is it time for another special dividend from Lloyds Banking Group plc (LON: LLOY)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Lloyds (LSE: LLOY) has come a long way since its 2008 bailout.

Today, the bank is arguably one of the best-managed in Europe and is almost certainly achieving some of the best returns in the European banking sector. And now that Lloyds’ recovery is largely complete, the bank is beginning to return excess capital to its long-suffering shareholders in the form of special dividends as well as regular dividend payouts.

A history of capital returns

Lloyds has a history of returning the majority of its profits to investors. Indeed, before the financial crisis, Lloyds was known as one of the UK’s top dividend champions, offering shareholders a high-single-digit dividend yield.

Today the bank is gradually rebuilding its dividend champion reputation.

After six years without declaring a single dividend payout, Lloyds dished out its first dividend to investors since the financial crisis during 2014. Then, for the bank’s 2015 financial year, management declared an ordinary dividend of 2.25p per share and a special dividend of 0.50p, the combination being up from only 0.75p in total the year before.

It looks as if the bank is set to announce a similar increase in its total dividend payout this year. City analysts have pencilled-in a payout of 4.4p per share for 2016, a near 100% hike on last year’s payout and equivalent to a yield of 6.2% at current prices. But Lloyds could decide to return even more cash to investors depending on how the UK economy performs over the next 12 months.

Economic growth

As one of the UK’s largest lenders, Lloyds’ success or failure depends on the strength of the country’s economy. Over the past five years the UK’s economic recovery, coupled with the housing boom, has allowed Lloyds to book some hefty profits and achieve a sector leading return on equity. However, if economic growth slows in the UK then Lloyds’ income will take a hit and the bank will be forced to not only accept a lower level of profitability, but will also be faced with higher loan impairment charges.

On the other hand, if the UK economy continues to chug along a steady pace, Lloyds’ profitability should remain stable and in this scenario the bank’s shareholders could be set for some windfall payouts.

You see, last year Lloyds’ management told the market that the bank was committed to returning excess capital to investors via both special dividends and share buybacks. In this case, excess capital is defined as capital over and above the amount Lloyds requires to grow the business and meet regulatory requirements. At present, Lloyds estimates that the minimum level of capital required for the business is around 12% (Tier one equity ratio). And at the end of the first quarter, the bank reported a Tier one capital ratio of 13%.

In other words, barring any sudden adverse shocks, Lloyds can return excess capital to investors this year.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »