2016 may be less than three months old, but it’s already been an eventful year for Lloyds (LSE: LLOY). Shares in The UK’s largest mortgage lender started the year on the back foot, slumping by a fifth to 58p on growth concerns. However, since reaching this low the bank’s shares have rallied hard and currently trade just under 70p, a gain of just under 25% from the lows. And after this rocky ride, year-to-date Lloyds’ shares are down by 4.75%, underperforming the FTSE 100 by 3.05%.
The big question is what do the next few months hold for the bank? Are Lloyds’ shares going to lack direction for the rest of 2016?
Well, as we saw back at the end of February when Lloyds released its full year 2015 results, the bank’s underlying business is relatively healthy. Indeed, Lloyds surprised the market by unveiling a special 0.5p dividend on top of a 2.25p ordinary dividend in respect of 2015, paying out a total of £2bn to investors. Moreover, the bank’s capital strength has improved dramatically since the financial crisis. Lloyds’ tier 1 capital ratio now stands at 13.9%, a level the majority of the bank’s European peers can’t match.
A bright future
Things should only get better for Lloyds going forward. The bank earmarked a further £2.1bn for PPI in the fourth quarter but believes this will be its last bulky provision for customer redress. The PPI saga should soon be out of the picture, freeing up billions of pounds for the bank to return to shareholders or reinvest in its business. Stripping out the impact of PPI, Lloyds reported an underlying profit before tax of £8.1bn for the full year, up from £7.8bn in 2014.
Still, much of Lloyds’ growth going forward will depend upon the bank’s ability to rein in costs and keep a lid on further customer compensation. During 2015 Lloyds’ mortgage lending only increased by 1%, below the market growth rate of 2.5% as the bank sought to safeguard margins. So, if you’re looking for sales growth, Lloyds may not be the bank for you.
That being said, Lloyds’ cost-cutting drive, robust capital ratio and shrinking compensation costs make the bank a capital return story.
Simply put, if you’re looking for dividends Lloyds could be the investment for you. City analysts expect Lloyds’ dividend payout per share to hit 4.1p this year for a yield of 5.9% at current prices. Next year, analysts expect the bank to announce a dividend of around 5p per share for a yield of 7.1%.
Income champion
So overall, based on the current City forecasts it looks as if Lloyds is going to struggle to grow during the next few years.
However, the shares look like a great income investment and in today’s low-interest rate environment, a yield of 7.1% for 2017 is extremely attractive. And with this being the case, if Lloyds can prove that its payout is sustainable over the long-term the bank’s shares should move higher.
