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Lloyds Banking, NatWest et al likely to drive their dividend yields back above 5% within a couple of years

Talk of a £22bn dividend bonanza in the banking sector might be a bit far-fetched but based on broker forecasts, we can at least expect dividend yields to be above the FTSE 100 average by next year.

Barclays PLC -

It is probably going to take a couple of years but dividend yields on UK banking shares are set to top 5%, according to broker forecasts.

The Bank of England's financial stability report published on Tuesday finally removed what the central bank called the “extraordinary guardrails on shareholder distributions” imposed at the time of greatest uncertainty over the coronavirus epidemic in the UK.

In theory, the BoE's green light could see the banks jam the foot on the accelerator pedal and ramp up dividends at the old hurry-up.

The broker Jefferies has calculated that the banks could “repatriate” around 30% of their market capitalisation between now and 2023 without causing the Bank of England any alarm over balance sheet strength.

READ Bank of England gives mixed signals on bank dividends, SME debts and market risk‐taking

Not all of that repatriation (if it happens) will be in the form of dividends, however; share buybacks are also an option and these are often the favoured means of “returning capital to shareholders” for management as cancellation of a share buyback programme attracts less publicity than the cutting or cancellation of a dividend.

Nevertheless, brokers do foresee an impressive rise in the currently insipid dividend yields offered by London’s listed banks.

It's been a while since banks were yielding less than the Footsie

Barclays PLC (LON:BARC), yielding 0.6%, is currently the worse yielder but three years’ hence broker forecasts suggest it will be yielding 5.9%, a return only bested by HSBC Holdings PLC (LON:HSBA), which is currently yielding 2.6% and is projected to be yielding 6.0% in three years’ time.

Retail investors’ favourites Lloyds Banking Group PLC (LON:LLOY) and NatWest Group PLC (LON:NWG) are currently yielding 1.2% and 1.5% respectively. By next year, those yields are currently expected to rise to 4.7%-4.8% (assuming investors buy at current prices and the dividends rise as the brokers forecast).

The following year both are expected to be yielding 5.4% before Lloyds overtakes state-owned NatWest in year 3 with a yield of 5.8% versus NatWest’s 5.5% yield.

Income investors would certainly welcome a return to such juicy yields, especially as there is usually not much else in terms of excitement attached to owning shares in banks. To put the banks' current yield into perspective, a weighted basket of all the FTSE 100 stocks is expected to yield around 3.7% this year.  

Last year, dividend payouts from UK PLC collapsed by a record £44.8bn and the constraints on dividend payouts by the banks were responsible for around a third of this fall.

Bank of America Merrill Lynch and Jefferies both favour Barclays to take on the unlikely role of dividend champion, with the former noting that NatWest’s position is muddied by the government’s 55% stake while Lloyds is about to get a new chief executive, who may want to get his feet under the table before condoning a major change in dividend policy.

Quick facts: Lloyds Banking Group PLC

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