Is Lloyds Banking Group PLC A Safe Dividend Investment?

Not all dividends are as safe as they seem. What about Lloyds Banking Group PLC (LON: LLOY)?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

LloydsSince the credit-crunch, Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) hasn’t paid a dividend, but the firm intends to restart payments in the second half of 2014.

Recent trading updates seem full of news about a profit recovery, so it’s no surprise that dividends seem set to resume. City analysts following the firm think the new payout will be around 1.27p for the current year, rising to 3.15p in 2015. At the current share price around 76p that means the forward yield is running at around 1.7%, rising to 4.1%.

Is a potential 4.1% dividend yield attractive?

A yield of 4.1% might seem attractive for some firms, particularly those engaged in businesses other than banking, but that’s a low yield for a bank, I’d argue.

Should you invest £1,000 in NatWest Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if NatWest Group made the list?

See the 6 stocks

If we look at earnings’ growth for Lloyds, we can see that the current year shows an expected step-change to positive territory from the losses of recent years. That’s good, but 8% growth in 2015 is pedestrian, and such predictions signal a return to on-trend normality — Lloyds’ recovery in earnings has essentially happened.

So what does back-to-normal growth look like for a bank? When we see ‘normal’ trading conditions, such as now, it means we are mid-macro-economic cycle. Trading conditions seem set for a benign period without too many economic shocks. Yet the forward-looking stock market will likely keep a lid on its valuation of banks. At least it should do because their profits tend to rise and fall in tune with general economic conditions and profitability could plunge at any time.

Lloyds currently trades on a forward P/E rating of around 9.2 for 2015. In one model for accommodating the cyclicality of bank shares — my favourite — the P/E rating is seen as tending to  fall as profits gradually rise, and as the current macro-cycle unfolds. That means that the dividend yield seems likely to rise.

However, the risk for investors now is that capital attrition could work against income gains to deliver a lacklustre outcome on total returns, despite apparently improving trading. Then there’s the ever-present gun to the head thanks to not knowing when Lloyds will face its next cyclical profit collapse — could the London-listed banks be any more unattractive right now? Surely, there are better income opportunities in other sectors.

What now?

Lloyds continues to sell off its well-performing TSB division as obligated by European Commission State Aid commitments. Meanwhile, the UK government is making progress towards returning Lloyds to full private ownership (PLC status) and has reduced its shareholding to around 25%. That’s sobering news and indicates just how low an out-and-out cyclical company can go.

The firm is rebuilding itself to focus on the UK market and seems set to emerge as a stronger, leaner and more functional financial institution in the end. I’m glad about that, because the bank can then get on with facilitating British economic activity, which underpins my investments in other industries. However, when it comes to searching for long-term investments, I’m lumping banks such as Lloyds into the ‘no’ pile, along with the likes of airlines and other cyclical sectors. Such sectors require a shorter-term approach to investing, in my view.

I’m not keen on Lloyds Banking Group shares just now, and I don’t think I’m the only investor who feels that way.

Should you buy NatWest Group now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

How Warren Buffett stays ahead of the stock market

When share prices fall, everyone suddenly wants to be like Warren Buffett. But what’s the secret to the Berkshire Hathaway…

Read more »

Investing Articles

Cheap UK dividend shares to consider buying right now

We're only just past the first quarter of 2025, but it already looks like the year could be another good…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

What the heck is going on with the Barclays share price now?

The Barclays share price surged 25% as the market open on 10 April. Once again, the volatility’s been driven by…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

What the devil’s going on with the HSBC share price?

The HSBC share price has actually been less volatile than some of its peers, despite its Chinese operations suggesting it’s…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

Are Tesco shares a screaming buy after sinking to 9-month lows?

Tesco shares continue to experience price weakness as signs of mounting competition grow. But is it now too cheap to…

Read more »

Investing Articles

Down 31%! 1 top growth stock to consider at $10 for a Stocks and Shares ISA

This high-quality stock has pulled back sharply since November, making it a possible candidate for a growth-oriented Stocks and Shares…

Read more »

Long-term vs short-term investing concept on a staircase
Investing Articles

Down 28% in 8 months, is AstraZeneca’s share price too cheap for me to pass up right now?

AstraZeneca’s share price has fallen a long way from its September high, but this may mean an opportunity for me…

Read more »

Investing Articles

Is April a great time to start investing?

Our writer spotlights a top-tier tech stock that has sold off recently, making it worthy of consideration for someone ready…

Read more »