The Lloyds Banking Group (LSE: LLOY) share price has fallen by mid-single-digit percentages in 2022. But in recent weeks the FTSE 100 bank has picked up as risk appetite has returned to markets.
Could Lloyds shares be on the cusp of a stunning recovery? And should I buy this popular dividend share for my own portfolio?
5%+ dividend yields
Lloyds has been a favourite among income stock collectors for a very long time. Sure, the firm might operate in a cyclical industry. But its focus on the more robust retail banking segment means dividends are less susceptible to being sliced when times get tough.
This quality is underlined by current broker forecasts. Analysts think the bank will pay dividends of 2.43p and 2.73p per share in 2022 and 2023, respectively, up from 2p last year.
These figures yield 5.2% and 5.8%. And they come despite City predictions of earnings volatility over the period (a 7% bottom-line fall is expected in 2022 before a 3% recovery next year).
Tip-top shape
The profits outlook for Lloyds is uncertain for next year as the UK economy splutters. The bank has already set aside more than £1bn for bad loans and is expected to add to these provisions.
But right now the business looks in good shape to meet these dividend forecasts. Predicted shareholder payouts are covered between 2.6 times and 2.9 times by anticipated earnings. Any reading above two times gives a wide margin of error in case profits disappoint.
Lloyds’ robust balance sheet provides another cushion for dividend estimates. The bank’s CET1 capital ratio rang in at 15% as of September, well ahead of its targeted 12.5%.
Super cheap
So what’s the likelihood of Lloyds’ share price bouncing back in 2023?
Well, fans of this FTSE index stock would argue that its low forward P/E ratio of 6.5 times reflects the difficult economic environment. This could provide scope for price appreciation next year, and especially if the UK economy performs better than expected.
Lloyds shares could also rise strongly if the Bank of England keeps hiking rates to counter inflationary pressures. Higher rates this year have helped the banks make bigger profits from their lending activities.
The verdict
Having said that, I don’t plan to buy the Footsie bank for my own portfolio today. And it’s not just because profits could remain under pressure beyond next year (the CBI has predicted a recession lasting until well into 2024).
I’m also not convinced that Lloyds shares could deliver attractive earnings (and thus dividend) growth over the longer term. Britain’s economy is tipped for slow growth for much of the decade as it grapples with the legacy costs of Covid-19 and disruption caused by Brexit. High street banks like this also face increasing competitive pressures as the number of challenger banks steadily grows.
There are plenty of other cheap dividend shares that I, as a long-term investor, would prefer to buy today. The Lloyds share price may well continue to rise as we move into 2023. But I think there are much better stocks to buy to make lifelong passive income.
