Is Lloyds’ share price one of the best income plays in the FTSE 100?

Changes to the UK bank’s dividend payments and share buybacks are making Lloyds share price [LLOY] a strong bet on the LSE.

Lloyds' share price has supported a significant dividend payout for a couple of years now. The FTSE 100 banking group boasts a forward annual dividend yield of 5.13% at a rate of £0.03 – an attractive bet for long-term income investors.

Lloyds’ generous shareholder payouts are part of a wider trend among UK companies that Link Asset Services believes will continue throughout the year. Link’s dividend monitor survey found that UK shares paid a record first-quarter figure of £19.7bn worth of dividends in the first three months of 2019. Although special dividends are not something that investors normally expect to continue, Links’ report suggests this year will be different.Lloyds' 1-year share price performance, CMC Markets, 04 June 2019

UK shares collectively have a dividend yield of 4.6%, which is down slightly from the 4.8% recorded in January but still well up on the 30-year average yield of 3.5%, according to Morningstar. The FTSE 100 is set to yield 4.8% over the next 12 months compared to the FTSE 250’s 3.1%.

Schroders’ Sue Noffke, who manages the firm’s Income Growth fund, believes that either a 25% fall in dividends or a 37% rise in market value would have to occur for the UK yield to return to its 30-year average of 3.5%. But she notes that even during the financial crisis, the cumulative cuts in dividends only amounted to 15%. 

“We’re talking about something that is materially larger as a hit to dividend income being priced into UK equities against global markets. That explains why, as a patient long-term investor, UK equities offer great opportunities now,” she added.

Shareholder payday 

Despite profit only growing by 2% in its first quarter results, Lloyds has been committed to rewarding its shareholders with a payout ratio of 56.73%.

Lloyds share price vitals, Yahoo finance, 04 June 2019

In February, the bank announced it will increase the number of dividend payments from two per year to four, from Q1 2020. Then came reports that shareholders could be in line to benefit from another £1bn in buybacks, in addition to the £1.75bn share repurchase programme announced in 2018. 

The surprise payout is due to the Bank of England’s Prudential Regulation Authority lowering the amount Lloyds is required to keep in reserve to safeguard against a downturn in the market. The decision resulted in capital surplus for the bank of roughly £1bn. 

The question of whether that will be translated into a payout was alluded to when a Lloyds spokesperson told the Financial Times: “The group . . . will continue to give consideration to the distribution of surplus capital to shareholders at the end of the year, while also continuing to look for ways to use its position to benefit our customers.”

“The group . . . will continue to give consideration to the distribution of surplus capital to shareholders at the end of the year, while also continuing to look for ways to use its position to benefit our customers.” - Lloyds spokesperson to Financial Times

Lloyds has a reputation for its generous share buyback capacity, and analysts were quick to ascertain that would be the priority, although there is still a possibility the capital could be held aside for regulatory changes. 

Whether or not this happens, Lloyds’ stock holds average ratings of “outperform” and “buy”, with 7 analysts recommending each, according to Reuters, with Davy Research going as far to say that the lender is a “preferred play” in the UK banking sector after upgrading its rating from “neutral” to “outperform”. The Irish broker raised its target price from £0.70 to £0.71, citing a strong capital return and a more resilient earnings forecast; the revised target represents a 24% upside on the current price.

Despite its strong position, Lloyds is subject to the ups and downs of the UK economy and Brexit presents a persistent headwind that shareholders should bear in mind.