Lloyds (LSE: LLOY) shares sport an attractive dividend yield right now. With analysts forecasting a payout of 3.15p per share for 2024, the yield’s around 6.1%.
Could they be a decent buy for my ISA given this bumper yield? Let’s discuss.
Dividend appeal
From a dividend investing perspective, Lloyds shares certainly look interesting right now.
For starters, the payout is on the rise. Last year, the bank hiked its cash distribution by 15% to 2.76p per share, in line with its ‘progressive and sustainable’ ordinary dividend policy.
Analysts expect another 14% rise this year (3.15p) followed by a 12% rise next year (3.52p). That latter forecast equates to a yield of around 6.8% at today’s share price.
Secondly, dividend coverage (a measure of sustainability) is quite high. With analysts forecasting earnings per share of 6.4p this year, the dividend coverage ratio is a little over two. A ratio over two typically indicates there’s little chance of a cut in the near term.
Finally, the bank’s also rewarding investors with share buybacks. In its 2023 results, Lloyds advised it plans to buy back £2bn worth of stock. Buybacks can help to push earnings per share up over time (potentially making existing shares more valuable).
It’s worth noting that overall capital returns in 2023 (dividends and buybacks) amounted to £3.8bn – equivalent to a yield of about 14% at the 16 February share price.
Digging deeper
Of course, we need to take a step back and look at the company/stock as a whole. There’s no point picking up a 6.1% dividend yield this year if the share price is going to fall 20%.
Now, Lloyds shares tend to be a bit of a proxy for the UK economy (which fell into a recession late in 2023). And I’ve some concerns on this front.
In the company’s full-year results, management said the bank’s portfolio remains “well-positioned in the context of the economic environment with broadly stable credit trends and strong asset quality”.
Have we seen the worst of the economic conditions though?
I’m not sure. While it sounds like the recession from 2023 will be short lived, I’m not totally convinced we have seen the lagged effect of higher interest rates really kick in yet.
Another issue to consider is the Financial Conduct Authority’s (FCA) investigation into motor finance mis-selling. According to analysts at RBC, Lloyds could be looking at a fine of up to £3.5bn here.
That kind of fine could have a big impact on the bank’s profits. To date, Lloyds has only made a provision of £450m.
Share price gains
It’s also worth noting that Lloyds’ share price has had a big run recently.
Since mid-February, it has climbed nearly 30%. After that kind of run, there’s always the chance of a pullback.
Note that at present, the bank’s price-to-earnings (P/E) ratio is about eight. At that multiple, I think Lloyds is fully valued.
My call
Weighing everything up here, Lloyds shares aren’t a buy for me right now.
The yield does look attractive. However, all things considered, I think there are better opportunities in the market.
