Lloyds (LSE: LLOY) has the potential to become one of the FTSE 100‘s top dividend stocks over the next five years.
Now that the bank’s recovery is nearing its completion, many City analysts believe that Lloyds will return to its old ways, returning the majority of profits to investors.
Income champion
Before the financial crisis hit, Lloyds was one of the UK’s biggest dividend payers. The bank paid out just over half of its profits during 2005 and 2006, which equated to a dividend yield of between 6.5% and 7% during each year respectively.
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And City analysts believe that now Lloyds has been allowed to restart dividend payments, the bank’s payout ratio will return to 50% and could even hit 70% as legacy issues fall away.
Lloyds’ own management has stated that the bank plans to increase its ordinary dividend payout ratio to at least 50% of sustainable earnings in the near-future. What’s more, management has stated that it will look to return “surplus capital” to investors through other means as well as regular dividends.
At present, Lloyds estimates that the minimum level of capital required for the business is around 12% (tier one equity ratio) any additional capital reserves over this level can be returned to investors.
Capital return
Based on current figures, City analysts believe that Lloyds could return £20bn to £25bn to shareholders over the next three years. Overall, Lloyds could return 43% of its current market cap. to investors by 2018, which is why I’m looking to buy Lloyds.
However, I’m planning to wait for the government’s retail share offering before taking a position. You see, based on current expectations the retail share offering is expected to be conducted at very favourable terms for private investors.
Now, I should say that as the terms of the retail offer are yet to be announced, we can only speculate as to how the government will go about pricing the offer. Nevertheless, City analysts are currently expecting the shares to be sold at a 5% discount to the prevailing market price. Also, there’s some speculation that a teaser offer in the form of a 10% bonus, up to the value of £200, will be made to investors who hold their allotted shares for a year.
So overall, when the government finally announced its Lloyds retail share offering, investors will have the chance to buy a company with all the hallmarks of a great long-term income investment, at a below market price.
Special dividend this year?
But for those investors that can’t afford to wait, there’s a chance that Lloyds could announce a special dividend towards the end of this year.
As Lloyds’ fully loaded tier one capital ratio is already above the key level of 12%, as required by management (13.3% at the end of June) Lloyds could begin returning excess cash to investors as soon as this year.
Lloyds has the largest number of retail investors of any FTSE 100 company and the bank’s management could be looking to help investors work their way around the new dividend tax rules set to come into force next year.
