JP Morgan has upped its price target for Lloyds Banking Group PLC (LON:LLOY) on the prospect of a dividend hike both this year and next.
Analysts at the US investment bank now expect Lloyds to pay out a 3p dividend this year as well as a 1.25p special dividend.
READ: PPI provision worries might be fading, but loan impairments still rising at Lloyds Banking Group
“Despite upward pressure from regulatory capital requirements, we believe that Lloyds is well positioned to meet or exceed consensus DPS expectations for 2017 while absorbing a potential rise in target Tier 1 capital ratio to 13.5-14%,” wrote Raul Sinha and co this morning.
Speaking of the Tier 1 capital ratio – the core measure of a bank’s financial strength from the regulator’s point of view – JP Morgan expects that to be a very healthy 14% this year.
As for next year, Sinha reckons the bank is “well-placed” to increase its total payout to 5p, given the “strong capital generation”, which would give the stock a yield of in excess of 7%.
READ: Lloyds profits jump on absence of fresh PPI provision but shares fall amid Brexit fears
Lloyds had its third quarter results out on Wednesday which showed a jump in profits, although its shares actually dipped on the day due to concerns over Brexit, an increase in PPI claims and other ongoing legacy issues.
JPM was impressed with the update though, which it said showed “positive trends” with Tier 1 capital management and net interest income ahead of its expectations.
“Following the results, we upgrade our adjusted earnings per share estimates by 4% for FY18/19, and price target to 85p (from 83p),” said Sinha.
As well as the price target hike, the analyst kept his rating at ‘overweight’ – a ‘buy’ in old money.
Lloyds shares were 0.1%, or 0.1p, higher at 68p on Thursday morning.