UK banks have been rewarding shareholders with bumper dividend payments this earnings season. Lloyds [LLOY] was the latest to reward investors with a 1.2p interim dividend payment in its recent half-year results, up 5% from the 2018 interim payout.
The hike comes despite Lloyds share price dropping over 16% this year. Yet for some traders, a healthy dividend payout might go some way to forgiving a stock’s poor performance.
Why the hike?
The hike follows similar moves by both Barclays [BARC] and RBS [RBS]. One reason is that tighter regulatory controls brought in after the 2008 financial crisis mean UK banks pose less of a threat to the wider economy. While this means they aren’t able to achieve the heady profits they once did, boards now feel more confident rewarding shareholders after some austere years.
And in two weeks, PPI payouts, another perennial bugbear for UK banks, will also soon be a thing of the past when the 29 August claims deadline hits. Good news for the banks which have paid out a collective £36 billion and counting.
Lloyds UK-focus and high street presence (it also owns Halifax and Bank of Scotland) meant it bore the brunt of the PPI scandal. In the half-year earnings update, Lloyds announced that it had put aside another £550 million to pay for UK PPI claims. With this weight removed, the bank could have even more cash available to return to shareholders.
How can Lloyds afford the dividend?
Despite the headwinds surrounding the wider UK economy and a slowdown in mortgage sales, Lloyds has managed to protect its dividend through cost-cutting.
In the half-year numbers, Lloyd’s total costs declined 5% compared to the same period last year. This helped the bank offset the 7.1% dip in profits. Lloyds has said that it is confident operating costs will come in under £8 billion for the full year. All good news for investors looking to the bank to protect any payout.
Brexit, however, is a concern. With a no-deal withdrawal from the EU back on the table, Lloyds would be more exposed than other banks to any Brexit-triggered slump in the economy. Unlike HSBC [HSBA] which makes most of its profits in Asia, or Barclays with its International business – a wholesale and consumer bank under Barclays Bank PLC -Lloyds is almost totally UK focused. This could spell trouble for the dividend if revenue fell.
|PE ratio (TTM)||9.15|
Lloyds share price vitals, Yahoo Finance, 13 August 2019
Is Lloyds a buy for income-seeking investors?
For those looking for consistent returns, Lloyds look to be a good option right now, as Citi analyst Andrew Coombs explained to the Telegraph:
“Investors should not own Lloyds for earning growth as it faces a challenging environment. However, the valuation is attractive and is underpinned by the returning of money to shareholders.”
Investors looking to burnish their portfolio with other banking stocks that deliver payouts have plenty to choose from. Barclays hiked its dividend up 20% thanks to the strong performance of Barclays International, in their recent results. RBS, which had only brought back its dividend last year, announced a special dividend of 12p a share, way above the predicted 4p.
“Investors should not own Lloyds for earning growth as it faces a challenging environment. However, the valuation is attractive and is underpinned by the returning of money to shareholders” - Citi analyst Andrew Coombs
Of the three stocks, RBS is the most expensive, with shares trading at 8.97X to earnings. Barclays trades on 8.03X earnings, while Lloyds is cheapest at 7.9X.
Among the analysts, the consensus rating for Lloyds is ‘Buy’. On Yahoo Finance, the average price target is 75.37 over the next year, which would represent a 51% upside. But this might be incidental for those looking for a consistent payout. How long Lloyds will be able to do this will depend on keeping costs down and weathering any Brexit-triggered downturn in the economy as the 31 October deadline comes into focus.