When I buy a high-yield share, I look for two different things. The obvious one is a handsome cash payment every year in the dividend itself, but I also want to see signs that the shares themselves are undervalued and that I could be getting some growth too.
When I bought shares in Lloyds Banking Group (LSE: LLOY) in 2015 at 76p, I thought I saw both. But though I’ve had a couple of years of rising dividends, the share price has actually fallen. At 62p as I write, I’m down 18p on the shares, and I’ve only had about 6p per share in dividends to compensate.
The Brexit vote and the uncertainty it caused for the banking sector had a big impact on confidence for the sector. And I also can’t help feeling that institutional investors might remain wary of the banking sector until the UK government has finally sold off its stake in Royal Bank of Scotland.
End of the tunnel?
But I’m seeing indications that the country’s anti-bank sentiment could be finally turning, and I still rate Lloyds as possibly the best high-yield stock on the FTSE 100 for long-term investors.
Fund managers in the US have been getting a bit bullish about the banking sector recently, after pretty much shunning the business in the wake of the financial crisis. And there are signs of improving optimism here with consensus forecasts coming in with pretty solid buy ratings for our three top UK-focused banks, Barclays, Lloyds and RBS.
Looking at Lloyds itself, recent price targets from analysts are ranging around 80p-90p, indicating that they see an upside of about 35% over the current price. This time last year we were looking at targets averaging around 75p, so that does suggest increasing bullishness.
Even at a price of 90p, Lloyds shares would still be on a forward P/E of a little over 12, which compares favourably with the FTSE 100’s long-term average of around 14. And forecast dividend yields for this year and next would be standing at 3.8% and 4.1%, which I would still find attractive — especially as there are inflation-busting rises on the cards.
As it stands, at today’s price, we’re looking at P/E multiples of only 9.2 this year and 8.4 next, which I reckon would look cheap even without good dividends. And Lloyds is expected to deliver a yield of 5.5% in 2018, followed by 5.9% in 2019.
What dividend-seekers want
In its full-year results for 2017, Lloyds reiterated its commitment to “progressive and sustainable ordinary dividends whilst maintaining the flexibility to return surplus capital to shareholders.” And we’ve already started seeing the second part of that in action. In March, the bank commenced a share buyback programme and is expected to repurchase up to £1bn in shares.
To me Lloyds looks like a strongly cash-generative company which is paying good dividends and is committed to returning capital to shareholders whenever there’s surplus knocking around. That convinces me I really am seeing the two things I want — high dividends and a likelihood of share price growth.
I do think we might still have to wait until we see the final shape of our Brexit agreement before Lloyds shares start to appreciate significantly, but for long-term investors that’s really no time at all. And in the meantime, we can just keep taking the cash.
Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Barclays and Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.