Conditions are getting tougher for UK banks. But this doesn’t derail City analysts’ belief that dividends on Lloyds Banking Group (LSE:LLOY) shares will continue climbing.
Current forecasts suggests that an improved 2.77p per share reward for 2023 will rise to 3.19p next year. This results in a delicious 7.5% dividend yield.
By comparison, the broader forward yield for FTSE 100 shares sits way back at 3.9%.
Truth be told, Lloyds shares offer fantastic all-round value. The Black Horse Bank also trades on a price-to-earnings (P/E) ratio of 5.9 times for 2024, well below the Footsie’s prospective average of 12 times.
So should I buy the banking giant for its dividends next year? Or would I be better buying other UK value stocks for my portfolio?
Rock-solid forecasts
Starting things off on a positive note, the bank looks to be in great shape to pay out 2024’s expected dividend.
That predicted reward is covered 2.7 times over by anticipated earnings. This is well above the minimum security benchmark of 2 times that income investors seek. Even if profits are blown off course, this provides a decent margin of safety for projected dividends to materialise.
On top of this, Lloyds has a strong balance sheet it can make use of to help it pay that predicted dividend. Its CET1 capital ratio dropped 40 basis points during the year to September, to 14.6%. But this is still one of the highest among the UK’s listed banks.
Indeed, the bank’s decision to buy back £2bn worth of its own shares underlines its robust financial position.
Alarm bells
But I have to weigh up whether these robust dividend forecasts make the FTSE bank an attractive buy for the new year. And in all honesty I’m not convinced that it’s a sensible investment in the current economic climate.
In fact, Bank of England (BoE) governor Andrew Bailey told the Newcastle Chronicle this week that the country’s potential growth rate “[is] lower than it has been in much of my working life.” A sluggish (or even shrinking) economy would hit loans demand across the retail banking sector and likely push credit impairments higher.
The banks can also expect their net interest margins (NIMs) to trek lower in 2024 as the BoE (in all likelihood) stops hiking rates and the impact of fierce competition weighs. Lloyds’ NIM is already dropping, in fact. It fell six basis points during the third quarter, to 3.08%.
The verdict
The Lloyds share price has dropped 10% since the beginning of 2023. And I believe it could continue toppling next year as tough economic conditions persist. It’s a prospect that, in my opinion, overshadows the likelihood of more market-beating dividends.
Unfortunately things aren’t looking good for the bank over the long term, either. Its focus on the mature UK market leaves it in danger of delivering worse returns that firms with operations in fast-growing overseas territories like HSBC and Santander.
For these reasons, I’d rather leave Lloyds shares on the shelf and look for other dividend stocks to buy.
