Today, I’m looking at the dividend outlook for FTSE 100 banks Lloyds Banking Group (LSE: LLOY), HSBC Holdings (LSE: HSBA), Barclays (LSE: BARC), Royal Bank of Scotland (LSE: RBS) and Standard Chartered (LSE: STAN).
The table below summarises the near-term prospects, based on analyst consensus forecasts for the banks’ 2014 final dividends and full-year 2015 dividends. The yield shown is the projected income return on the combined dividends at the recent share price.
| Recent share price | Forecast final dividend 2014 | Forecast annual dividend 2015 | Total | Yield | |
| Lloyds | 74p | 1.1p | 2.7p | 3.8p | 5.1% |
| HSBC | 612p | 14p | 35p | 49p | 8.0% |
| Barclays | 236p | 3.6p | 9.3p | 12.9p | 5.5% |
| RBS | 366p | 0.0p | 2.2p | 2.2p | 0.6% |
| Standard Chartered | 880p | 35p | 53p | 88p | 10.0% |
RBS is the low-yield outlier. Indeed, some analysts believe the 81% taxpayer-owned bank won’t pay a dividend until 2016, or even 2017. Clearly, this is not an attractive pick for dividend investors.
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At the other end of the scale, Standard Chartered is the outlier, with a potential income return of 10% through to 2015. However, Standard Chartered is seeing rising impairments on bad loans, and there are fears a credit crunch in China could force this Asia-focused bank to raise capital and cut its dividend. Standard Chartered seems the riskiest income bet right now.
I’m going to move on to Lloyds, HSBC and Barclays by way of a look at the banks’ dividend payout ratios; that’s to say, the percentage of earnings they dish out to shareholders as dividends. The forecast ratios for 2015 vary significantly: HSBC has the highest ratio at 59%, followed by Barclays (50%), Standard Chartered (48%), Lloyds (33%) and RBS (7%).
Now, let’s see what would happen to the yields in the table above if the companies paid out their forecast 2014 final dividends plus the same 59% of their 2015 forecast earnings as HSBC.
| Hypothetical yield | |
| Lloyds | 8.0% |
| HSBC | 8.0% |
| Barclays | 8.0% |
| RBS | 5.2% |
| Standard Chartered | 11.4% |
RBS and Standard Chartered would remain outliers at either end of the spectrum, but Lloyds, HSBC and Barclays would all yield an identical 8%.
Let’s be clear, Lloyds and Barclays aren’t going to pay out 59% of earnings as dividends in 2015, but what the exercise shows us is the potential of these birds-in-the-bush to rival the income of bird-in-the-hand HSBC.
How things will actually pan out for investors is difficult to predict. The banks have many risks in common that could put pressure on earnings and dividends (notably, regulation), but each also has distinct risks: for example, HSBC’s large exposure to China, Lloyds’ big share of the UK mortgage market, and Barclays’ substantial, but troublesome, position in investment banking.
Projected dividend yields of most of the banks are certainly looking attractive right now, but with the release of annual results just a few weeks away there seems little sense in rushing into an investment.
We’ll be much better placed to decide where — or whether — to invest once we’ve had the banks’ announcements of their 2014 final dividends, updates on the economic outlook in the geographies and business segments in which they operate, and news on forward dividend policies, payout ratio targets and so on.
