Last week’s 2020 results from Lloyds Banking Group (LSE: LLOY) received a cautious reception from the market. Lloyds’ share price ended the day flat, but I didn’t think the 2020 numbers were too bad. After a tough first half of the year, the bank’s performance was much stronger during the second part of the year.
I’m interested in Lloyds shares because I think the bank could be a classic value play. The shares are trading 20% below book value and my analysis suggests the bank’s dividend payout could recover strongly from 2021.
A turning point?
The PRA — the UK’s banking regulator — barred the big banks from paying dividends last year. Lloyds’ shareholders missed out on the 2019 final dividend and the 2020 interim payout.
The dividend ban caused Lloyds’ share price to crash, but the regulator was worried that the pandemic would trigger a wave of bad debt, leaving the banks short of cash.
So far, this hasn’t happened. What did happen is that banks including Lloyds allowed dividend cash to pile up on their balance sheets, creating a buffer to handle future losses. I estimate that by cancelling the dividend, Lloyds saved around £2.3bn last year.
Banks have now been allowed to restart dividend payments. Lloyds shareholders will receive a payout of 0.57p per share for 2020, giving a yield of 1.5%. That’s the maximum allowed by the PRA for 2020, but if profits recover in 2021, a much bigger dividend should be possible.
Profits could double in 2021
We don’t yet know how quickly the economy will bounce back when Covid-19 restrictions finally end. The bank’s management admit that government support measures and payment holidays have probably prevented — or delayed — some business failures and job losses.
However, Lloyds’ accounts also show that both consumers and businesses were hoarding cash and repaying debt during 2020. These cash reserves could support a strong recovery for the economy.
City banking analysts certainly expect Lloyds profits to stage a strong recovery. Ahead of Wednesday’s full-year results, consensus forecasts suggested that Lloyds’ pre-tax profit could double in 2021. A dividend of 1.6p was pencilled in for 2021, giving a yield of 4.1%.
Lloyds share price: what next?
There are clear risks here. As a UK-only bank, Lloyds’ performance is heavily linked to the wider UK economy. If the pandemic is followed by a long recession, then the bank’s losses could be greater than expected. This could limit dividend payments.
Even if things go well, delivering growth could be tough. Lloyds is already one of the UK’s largest financial institutions. Where can it go next?
According to management, the bank’s new strategy will be to focus on becoming the “preferred financial partner” for its existing clients. That means focusing on areas such as wealth management and insurance for existing customers. Corporate clients may be targeted with add-on services such as foreign exchange.
I’ve been wrong about Lloyds share price before. But my view today is that Lloyds is in good shape and could satisfy my requirements as a dividend share. I’d consider buying the stock as a long-term hold at current levels.
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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.