The Lloyds (LSE:LLOY) share price has been doing very well lately. Since announcing its 2023 results on 16 February, the bank’s stock has risen more than 25%.
But today (11 April) it goes ex-dividend. Those buying shares will not be entitled to receive the final dividend in respect of the year ended 31 December 2023 (FY23). This means — all other things being equal — the share price should fall by 1.84p, the value of the final payout.
Ex-dividend day is always a timely reminder as to why I own shares in the bank. I’m not expecting huge capital growth, although that would be nice. Instead, I’m looking for a steady and reliable stream of passive income. Presently, the stock’s yielding over 5%. This compares favourably to the FTSE 100 average of 3.9%.
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Looking ahead
And according to analysts’ forecasts, the dividend is expected to grow annually by an average of 12.4% over the next three years.
If these estimates are correct, I should receive payouts of 3.15p (FY24), 3.52p (FY25), and 3.92p (FY26).
Based on these figures, a sum of £20,000 invested today — the most that can be put into a Stocks and Shares ISA in the current tax year — would generate £3,996 in dividend income in respect of the bank’s next three financial years. That’s a total return of 20%, and far more than I’d expect to earn from one of Lloyds high-interest savings accounts.
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Of course, these forecasts could be wrong. And dividends are never guaranteed. But I’m hopeful that the stock will give me the generous second income that made me want to invest in the first place.
Earnings potential
However, looking at the analysts’ predictions gives me another reason to be optimistic. Presently, Lloyds stock is valued at 6.8 times its 2023 earnings per share (EPS). If the forecasts of the ‘experts’ are accurate, EPS should rise to 8.72p, in FY26. Maintaining the same earnings multiple as now would imply a share price of 59p. That’s approximately 11% higher than it is today.
It’s also possible that the stock could attract a higher valuation given that a share price of 59p in 2026, and a dividend of 3.92p, would give a yield of 6.6%. But when it comes to the Lloyds, I try not to get too carried away.
That’s because looking at the five-year price chart reminds me that it’s had a turbulent few years. Banking stocks tend to have volatile earnings as their performance tends to mirror that of the wider economy. For banks, higher interest rates are a double-edged sword. Although they help earnings and margins, they also increase the likelihood of loan defaults.
Lloyds derives nearly all its income from the UK, which makes it particularly vulnerable to a domestic downturn. However, most economists are predicting a return to growth this year for the economy, albeit at a relatively modest rate.
That could be why, according to data compiled by Refinitiv, 10 brokers are recommending the stock as a ‘buy’ to their clients. However, it should also be noted that five are giving it a ‘neutral’ status and one is advising to ‘sell’.
Despite the risks, I plan to keep my shares for the foreseeable future, hoping to bank some generous dividend cheques from time to time.
