Lloyds Banking Group PLC (LON:LLOY) is likely to climb up the dividend table, analysts said after the lender’s trading update on Thursday.
While the FTSE 100 bank’s first quarter saw a flat top line and profit hit by £100m of further PPI charges and £339mln from items including the termination of its deal with Standard Life Aberdeen, there were silver linings to be seen, including prospects for future dividends.
READ: Lloyds posts flat profit as it takes hit for ending Standard Life Aberdeen contract early
Stripping out the one-offs, quarterly underlying profits were up 8% to £2.2bn thanks to lower costs and a £136mln revenue contribution from the new wealth management joint venture with Schroders.
As well as the deadline for PPI claims coming to an end this summer, further good news arrived this week from the banking regulator.
The Bank of England’s Prudential Regulation Authority has “thrown Lloyds a bone”, said Laith Khalaf, senior analyst at Hargreaves Lansdown, by reducing its capital requirements, “which gives the bank a bit more wriggle room, and may increase its propensity to make shareholder payouts this year”.
On present forecasts, Lloyds is in third place in the banking rankings for forecast dividend yields, behind Royal Bank of Scotland (LON:RBS) at the top and HSBC Holdings (LON:HSBA) in second, and ahead of Barclays PLC (LON:BARC) and Standard Chartered PLC (LON:STAN).
The big banks · Forward dividend yield · Forward P/E ratio · Market cap (£bn)
RBS · 6.04% · 8.41 · 28.88
HSBC · 5.99% · 11.91 · 134.37
Lloyds · 5.53% · 8.07 · 44.99
Barclays · 4.77% · 7.17 · 28.16
StanChart · 3.12% · 11.38 · 23.51
But the PRA decision a day before the quarterly update means Lloyds believes it now needs to keep hold of around 13.5% of its cash as a ‘systemic risk buffer’ in the event of another major financial crisis, lower than the previous ratio of 14%.
Analysts at UBS think this increases Lloyds’ 2019 capacity for a special dividend payout by £1bn, or 2.5% of its market cap.
Analyst Gary Greenwood reckoned Lloyds will have a capital surplus at the end of the year of between £1.9bn-£2.4bn, "which would theoretically be available to fund further distributions to shareholders" either by way of share buy-backs or special dividends.
Reflecting on Thursday’s results, Khalaf concluded: “Overall it’s a familiar story for Lloyds – the bank’s put in a solid performance, slightly marred by some one-off items. The share price has performed well so far this year, but even so Brexit continues to dominate sentiment, as Lloyds is indelibly plugged into the domestic economy.
“With a yield well over 5% though, Lloyds still looks like a bit of a cash cow for income-seekers.”
-- Table data via Hargreaves Lansdown --