After nearly seven years of waiting, it seems as if Lloyds (LSE: LLOY) (NYSE: LYG.US) is finally set to restart dividend payouts this week — a sign that the bank’s turnaround is finally starting to yield results.
The dividend announcement is expected to come on Friday when Lloyds unveils its full-year 2014 results. However, the payout isn’t expected to amount to much.
Indeed, City analysts are expecting a token dividend of 0.5p to 1p per share, which will cost the bank roughly £713m. A payout of 1p per share would equal a dividend yield of 1.3%.
And based on analysts’ expectations, a dividend payout totalling £713m will amount to just under 40% of the bank’s full-year 2014 profit. Analysts are expecting the bank to report a profit of £1.9bn for 2014.
Moving on
Lloyds’ last dividend payment was made during August of 2008, only a few weeks before the bank was bailed out by the UK taxpayer.
Nevertheless, Lloyds’ recovery it seems is now well under way and investors should be looking to the future, not concentrating on the bank’s shady past.
For example, Lloyds’ tier one capital ratio — financial cushion — is expected to have risen to 12.1% by the end of last year, up from 10.3% as reported at the end of 2013. A tier one ratio of 12.1% makes Lloyds one of the best capitalised banks in Europe.
What’s more, in order to officially declare a dividend payout, Lloyds will have to receive approval from the Bank of England’s Prudential Regulation Authority.
The PRA will only allow a dividend payout if they believe that Lloyds’ annual results, five-year operating plan and its capital strength are sufficient to ensure that the bank is not throwing cash away.
In other words, if Lloyds does announce a dividend at the end of this week, investors can be sure that the bank has a clean bill of financial health.
Dividend growth
A token dividend payout of 0.5p to 1p per share may not seem like much but it is a start for Lloyds.
What’s more, over the long term, City analysts believe that the bank will pay out 50% of profits to shareholders as a dividend. And based on this prediction, the bank is set to support a dividend payout of 4p per share during 2016, a yield of 5.2% based on the bank’s current share price.
In addition, according to my figures, Lloyds is severely undervalued in comparison to its banking sector peers. Specifically, the bank is currently trading at a forward P/E of 9.7, compared to the banking sector average of around 25.
If Lloyds’ valuation were to move in line to that of its peers, the bank’s shares could be worth up to 200p each by 2016 — a gain of 152% from current levels.
