Why passive income matters to Lloyds Bank shareholders

With the Lloyds share price continuing to disappoint, I’m thankful that the bank’s stock remains a great source of passive income.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Man putting his card into an ATM machine while his son sits in a stroller beside him.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Passive income is important to many shareholders, but especially those of Lloyds Banking Group (LSE:LLOY). It really helps ease the disappointment of an underwhelming share price performance.

The stock is down 26% since February 2019. Over a shorter time frame, its shares are now changing hands for 10% less than at the start of 2024.

Created with Highcharts 11.4.3Lloyds Banking Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL1 Feb 201910 Apr 2025Zoom ▾202020212022202320242025202020202022202220242024www.fool.co.uk

Dealing with disappointment

As one of the 2.3m people with a stake in the bank, I find this particularly frustrating. That’s especially so when I look at two common valuation metrics that suggest it’s undervalued.

Should you invest £1,000 in NatWest Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if NatWest Group made the list?

See the 6 stocks

The price-to-book ratio compares a company’s stock market valuation with its book (accounting) value.

If Lloyds were to cease trading today, and sold all its assets for the amount stated in its accounts at 30 September 2023 (£893bn), then used the proceeds to repay its liabilities (£848bn), there would be enough cash left over to return 67.6p per share to shareholders.

That’s a premium of around 57% to its current share price.

An alternative way to value a business, is to consider its profitability relative to its market cap.

Analysts are expecting a profit after tax of £5.3bn, for 2023. If correct, it means the shares currently have a price-to-earnings ratio of 5. This is low compared to the current figure for FTSE 100 of around 11.

A possible explanation

But with nearly all of its revenue generated in the UK, Lloyds’ performance is closely linked to the domestic economy.

Although rising interest rates will boost its income, there’s an increased risk of borrowers defaulting on their loans.

Also, the UK economy is struggling to grow at the moment.

I’m therefore not expecting its share price to escape the doldrums any time soon.

Payday

But I’m looking forward to May, when the bank pays its next dividend.

It will be its final payout for its 2023 financial year after it made an interim payment of 0.92p a share in September 2023.

Analysts are forecasting a dividend for the year of 2.7p, which means I could receive 1.78p in three months’ time.

However, I’m more optimistic. Based on the 15% increase in the interim dividend, I think the total amount paid for FY23 could be 2.76p — a yield of 6.4%.

Following the sale of Telegraph Media Group, there’s also the possibility of an additional payment in 2024.

One of the conditions of that transaction was that a loan of £1.2bn would be repaid to Lloyds.

The deal is still subject to government approval, but if it’s allowed to proceed, there’s been speculation that the bank could return an additional £500m-£700m (0.78p-1.1p per share) to shareholders.

Looking further ahead, the average of analysts’ forecasts is for dividends of 3.03p (FY24), 3.35p (FY25), and 3.71p (FY26).

Of course, returns to shareholders are never guaranteed.

But as far as I’m concerned, the possibility of receiving these sums helps to soften the blow of a lacklustre share price.

Without such a generous yield, I’d be struggling to find a reason to hold on to my Lloyds shares.

Although I believe the bank to be undervalued, its poor share price performance suggests other investors don’t agree with me.

Until this changes, I’m likely to remain a frustrated shareholder, albeit one receiving some large dividend cheques.

Should you buy NatWest Group now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Here’s why Tesla stock just rocketed 22.7%! Is it time to buy?

This writer wonders whether the news that sent Tesla stock soaring yesterday is a true gamechanger for the electric vehicle…

Read more »

Investing Articles

2 quality UK stocks to consider buying as share prices rally

With UK stocks moving higher, it might look as though investors with cash on hand have missed their chance. But…

Read more »

Investing Articles

How much £10,000 invested in Lloyds shares is forecast to be worth in 12 months

Harvey Jones is looking past today's stock market volatility to see where Lloyds shares may stand in a year's time.…

Read more »

Investing Articles

How Warren Buffett stays ahead of the stock market

When share prices fall, everyone suddenly wants to be like Warren Buffett. But what’s the secret to the Berkshire Hathaway…

Read more »

Investing Articles

Cheap UK dividend shares to consider buying right now

We're only just past the first quarter of 2025, but it already looks like the year could be another good…

Read more »

Young Asian woman with head in hands at her desk
Investing Articles

What the heck is going on with the Barclays share price now?

The Barclays share price surged 25% as the market open on 10 April. Once again, the volatility’s been driven by…

Read more »

Middle-aged white man pulling an aggrieved face while looking at a screen
Investing Articles

What the devil’s going on with the HSBC share price?

The HSBC share price has actually been less volatile than some of its peers, despite its Chinese operations suggesting it’s…

Read more »

Young Black woman looking concerned while in front of her laptop
Investing Articles

Are Tesco shares a screaming buy after sinking to 9-month lows?

Tesco shares continue to experience price weakness as signs of mounting competition grow. But is it now too cheap to…

Read more »