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Will Lloyds’ share price and dividend bounce back?

Lloyds’ army of shareholders have endured a tough time of in 2020. Not only has Lloyds’ share price crashed 57.6% so far this year, but the bank scrapped its dividend as well.

The bank last awarded shareholders in September 2019, in what now seems like a different world after the events of this year. There could be light at the end of the tunnel for Lloyds’ share price yet, however, as rumours grow that the dividend is coming back next year.

So, does Lloyds’ [LLOY] share price offer an opportunity to pick up a potentially dividend-paying stock at a discount?

 

 

 

Will Lloyds’ dividend return in 2021?

Lloyds’ share price suffered following the bank’s announcement in May that it had axed its dividend at the behest of the Bank of England's Prudential Regulation Authority (PRA). This was also true for the entire UK banking industry, with HSBC [HSBA], Barclays [BARC] and NatWest Group [NWG] all pausing pay outs in an effort to preserve capital.

In the last two weeks, however, Lloyds’ share price has rallied 12.55% — in part because CEO António Horta-Osório has signalled that the bank could restart its dividend. According to This is Money, Horta-Osório said at September's Barclays Global Financial Services Conference that Lloyds’ capital buffers exceed the requirements set by the Bank of England. That means it is well placed to reward investors, despite having to set aside £3.8bn to cover any potential bad loans.

While the economic impact of the coronavirus has been severe, Lloyds’ balance sheet has been rock-solid. In first-half results, the bank reported that it had a CET1 ratio of 14.6%, well above the minimum 8% capital ratio. The bank said that its balance sheet benefitted from a 'prudent approach to lending' and was 'well-secured'.

Lloyds isn't the only one making noises about restarting the dividend. NatWest Chairman Sir Howard Davies told The Mail on Sunday:

“I'm not aware of anyone [among the big banks] who is in deep trouble. The banks would be in a position where they could distribute [dividends] at some level.”

“I'm not aware of anyone [among the big banks] who is in deep trouble. The banks would be in a position where they could distribute [dividends] at some level” - NatWest Chairman Sir Howard Davies

 

Income seekers will know more in the next three months when the PRA decides whether banks can pay out dividends. That said, with the economy expected to take a downturn over the autumn and winter, green-lighting dividends might be a risky move from both a prudential and PR perspective. According to The Mail on Sunday “another full lockdown would blow a £100 billion hole in the UK economy.”

 

Which bank pays the best dividend?

Lloyds might be bringing the dividend back, but investors would be wise to shop around.  NatWest Group, formerly RBS, paid 2p a share for the first half of 2019, alongside a special 12p dividend, while Barclays paid 3p. Lloyds itself paid out 1.12p a share for the same time period.

The real value in banking stocks could be found by looking further afield, however. Across the pond, Bank of America [BAC] has a 2.99% forward dividend yield, while Citi's has a 4.73% yield. In Asia, Korea's Shinhan Financial Group Co has a 6.70% forward yield, and the Industrial and Commercial Bank of China carries a hefty 7.20% yield.

 

Market Cap£19.4bn
PE ratio (TTM)68.50
EPS (TTM)0.40
Quarterly Revenue Growth (YoY)-69.5%

Lloyds share price vitals, Yahoo Finance, 6 October 2020

 

Where next?

Whether or not Lloyds’s dividend returns in 2021 is still unconfirmed. For income seeking-investors, there are other options out there, especially if they are willing to look beyond the banking sector.

Lloyds’ share price currently trading far below where it started 2020 is the bank’s main draw. Should it recover these losses next year, investors could see both a decent gain and a potential dividend — providing this does come back. Of course, that’s a big if right now.

Among the analysts tracking Lloyds’ share price on the Financial Times, the stock carries a 38p 12-month price target. Hitting this would see a 40.8% upside on Lloyds’ share price through 5 October’s close.

Of the 23 analysts offering recommendations, Lloyds’ share price has 5 Buy ratings and 10 Outperform ratings.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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