Lloyds (LSE: LLOY) (NYSE: LYG.US) has been trying to restart dividend payments to investors for some time now, but so far the bank has failed in its attempts.
However, Lloyds is planning to ask regulators once again for permission to restart its dividend payments this month. Management hopes that regulators will grant the bank permission to restart dividends in time for the release of its fourth quarter results, scheduled for the end of this month.
And it seems that the chance of Lloyds getting the green light from regulators is high. Over the past 12 months the bank has proven that it is no longer dependent on state aid by passing several stringent stress tests conducted by both the Bank of England and the European Central Bank.
Income vs growth
Lloyds has shown regulators that it can stand on its own two feet, but this doesn’t mean that the bank will be allow to restart dividends this year. Regulators may want further proof that Lloyds is financially stable and able to support itself in the event of another financial crisis. This could mean additional stress testing and asset sales.
Still, if Lloyds does get the go-ahead to restart dividends, income investors will be well rewarded. City analysts believe that Lloyds’ dividend yield will hit 3.8% this year, and if regulators allow it then the bank’s dividend yield could hit 5.6% by 2016 — making Lloyds one of the FTSE 100‘s most attractive income investments.
That being said, there’s a chance that Lloyds won’t be allowed to restart dividend payments this year. But this isn’t bad news.
You see, Lloyds is now returning to growth and although investors may have to forgo a dividend this year, the bank’s rising share price should more than offset the lost income.
For example, according to City figures Lloyds is currently trading at a forward P/E of 9.3 for 2015. Analysts believe that Lloyds’ earnings per share are set to expand by 4% this year and a further 4% next year. On that basis, the bank is trading at a 2016 P/E of 8.9.
These figures indicate that Lloyds is severely undervalued in comparison to its peers. In particular, the banking sector average P/E stands at 24.7. If Lloyds’ valuation were to move in line to that of its peers, the bank’s shares could be worth up to 210p each by 2016 — a gain of 180% from current levels.
Many investors would be more than happy to pass up a token dividend payout for this kind of capital growth.
