As an investor, I had been waiting for Lloyds Bank (LSE: LLOY) to answer one question. It did so today, when it released its full-year results.
My question was — will it bring dividends back?
The LLOY share had a healthy dividend yield pre-pandemic. This meant that it was on my income investing watchlist since it had been given a regulatory go ahead to start paying them again.
Now that the question is answered, there is another one that follows. Is it a good share to buy now?
I think the answer is both yes and no. Here is why.
Dividends are back, but are they really?
First, let us consider the dividends. Lloyds has decided on a dividend amount of 0.57p per share. At a share price of 39p as I write, this translates into a dividend yield of around 1.5%. This looks underwhelming. But there are two aspects to consider here.
One, the dividend amount was not entirely at the discretion of Lloyds Bank. It was capped by limits set by the Bank of England’s Prudential Regulation Authority (PRA). These limits are dependent on the levels of risk-weighted assets and past profits. LLOY has actually paid the maximum amount possible under these limits.
Two, its dividends are not much different from that of another FTSE 100 bank that just reinstated dividends, Natwest, at 1.6%. It is also much higher than that for Barclays, which has a dividend yield of 0.6%.
As this “framework of temporary guardrails” as the PRA calls it, is eased, I reckon that banks like LLOY would like to increase their dividend amounts.
I say this because the LLOY share price dropped sharply after it paused dividends last year, indicating investor sensitivity to the passive income the share generates.
When the regulatory easing happens, however, remains to be seen.
Is Lloyds Bank a growth share now?
Until such time, I think it would be a good idea to buy the Lloyds Bank share only if it can be a good growth stock. I am not sure that it is, though, for the foreseeable future.
The Lloyds Bank share price rose sharply as the stock market rally started in November. While this is indeed a positive for shareholders, whose investment in LLOY had more than halved from the start of 2020 up to November, the earnings ratio for the bank is now close to 33 times.
I think that this is a pricey ratio for a share that still faces a lot of uncertainties. It also competes for investments against better performing FTSE 100 shares.
We can see the end of the pandemic by the middle of the year, but we still need to brace for an economic slowdown. Bad debts could be high and interest rates are already quite low. Also, financial services is still in limbo post-Brexit.
I’d like to wait for more clarity on the overall economic scenario and any changes to both the PRA’s dividend policy and LLOY’s own before taking a decision.
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Manika Premsingh has no position in any of the shares mentioned. 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.