Being a shareholder in Lloyds Banking Group (LSE: LLOY) must be a gratifying experience right now. The company’s stock has risen 37% in the last year and now its dividend is expected to grow. Analysts at Deutsche Bank said that given last year’s earnings, they expect Lloyds to spend £1bn on a new dividend and a further £1bn on share buybacks. With the bank’s full-year results expected to be released on Thursday, will all this good news boost the stock even more?
The Lloyds dividend
During the pandemic, Lloyds and other British banks were ordered by their regulator to halt dividend payments. Lloyds reintroduced its dividend last year, although at a far lower yield. I can see this as being a decision made out of caution, but it did little to incentivise me to invest. I’m sure shareholders at the time also had their grumbles.
Meanwhile, the company’s cash reserves continued to expand. When the financial system faces increased risks, banks are required to have a cushion of surplus capital to help sustain liquidity. However, I’m not a fan of banks holding large amounts of surplus capital, as history is filled with examples of their squandering it on ill-advised purchases. Instead, I prefer banks like Lloyds to give out extra cash as dividends to shareholders. The bank has declared that it has a progressive dividend policy, implying that it intends to increase its distribution in the future. That, however, is never certain.
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Fiscal results are due
Lloyds should release its full-year results on Thursday. I anticipate a solid set of figures based on what we witnessed in the first three quarters. However, there are dangers. Because of the company’s large mortgage book, any collapse in the housing market might impact profitability. Inflationary forces, such as rising energy prices, might raise the predicted default rate among borrowers, reducing earnings.
I see these outcomes as unlikely. House prices have risen quickly over the past few months, and the end of winter will see a reduced reliance on fossil fuels. But the risk is there.
Lloyds will also publish its projected final dividend for 2021. I am positive about this, given its cash position and industry developments. For example, competitor NatWest stated yesterday that it will pay a final dividend of 7.5p per share, up from 3p last year. Lloyds’ yield would rise to 4% if it hiked its final dividend at the same rate.
Will Lloyds raise its dividend?
So will the bank raise its dividend? Despite all of the positive press, we won’t know what Lloyds’ dividend plans are until Thursday. While it will benefit from a slew of new investors buying in to make the most of the buyback I think it pays to keep expectations low for now.
There’s a good chance that the current share price has already priced-in the dividend increase. This could help to explain why the share price has risen so much in the last year. If expectations aren’t met, a small rise could even cause the stock to fall. A significant gain, would be more appealing to investors.
Still, Lloyds has proven to be a solid business that takes care of its shareholders in times of crisis. I’d be happy to add it to my portfolio once the dividend details are made public.
