Results from Lloyds Banking Group PLC (LON:LLOY) today show the lender looking to be the star performer in a recovering UK sector, even before numbers from Barclays PLC (LON:BARC) and Royal Bank of Scotland Group PLC (LON:RBS) tomorrow, with dividend potential the shining hope.
Lloyds shares jumped over 3% higher this morning after first-quarter profits beat market expectations, with the lender also saying it is on track to hit full-year guidance despite any worries over Brexit and further conduct issues.
But what really excited investors was the dividend prospects for the group as the government finally looks to dispose of its remaining holding in the bank after its rescue with a £20.5bln bailout during the 2007-09 financial crisis, which left the taxpayer owning 43% of the bank.
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Steve Clayton, manager of Hargreaves Lansdown’s HL Select UK Income Shares fund noted: “The Government is almost out of the stock; their stake is less than 2% and all of the taxpayers investment has been paid back, with profits on top.
“The government’s involvement in Lloyds will now hopefully be little more than a passing interest, with no political interference in the business’s day to day decision making.”
The fund manager pointed out that, most importantly, Lloyds ability to generate capital, and its limited needs to retain much of that within the bank, means that it has “great dividend potential.”
He said: “Sure enough, today they have raised their guidance for capital generation which bodes well for the prospects for additional special dividends.
“On the ordinary dividend alone, Lloyds yields around 3.9% and special dividends later this year could take that higher still. If Lloyds can bring revenues back into growth then the prospects could improve further.”
Lloyds “promises to be a dividend cash cow in years to come”
Meanwhile, Michelle McGrade, chief investment officer of TD Direct Investing said she believes Lloyds “promises to be a dividend cash cow in years to come”.
She pointed out: “If interest rates rise and the mortgage market remains stable, this “bottom draw” share should continue to be a dependable dividend payer for years to come, and investors stand to benefit from buying it for the long-term and letting the power of compounding work its magic.”
McGrade said that the UK banking sector is returning to stronger financial health and as the economy continues to grow comfortably, she expects banks to provide “solid long-term capital and dependable dividend growth for shareholders”.
“It’s the potential for dividend growth which is the exciting aspect because this growth isn’t priced into (Lloyds) shares right now, and when confidence returns to the sector the shares will no longer be as cheap as they are today. Out of favour banks today will be our trusted dividend source in future,” she added.
Re-rating of the stock based on strong dividend potential “looks likely”
And Neil Wilson, senior market analyst at ETX Capital said it looks like Lloyds can manage to further increase dividends “perhaps as high as 6p this year if the tailwinds are right.”.
He pointed out that, at current valuations, that would equate to nearly a 9% dividend yield based yesterday’s closing price.
Wilson concluded: “A re-rating of the stock based on strong dividend potential looks likely.”