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* Bank to pay dividend of 0.75 pence per share
* CEO says payout will help government sell shares
* 2014 underlying profit 7.8 bln stg vs 6.2 bln
* CEO handed 11.5 mln pound pay package for 2014
* Labour lawmakers attack pay for top executives (Adds comment from CEO, Labour lawmaker)
By Matt Scuffham
LONDON, Feb 27 (Reuters) - Lloyds Banking Group ispaying its first dividend in more than six years after reportinga rise in profit and improvements in its capital strength, amilestone in the bank's recovery after it was bailed out duringthe financial crisis.
The bank, which was rescued at a cost of 20 billion pounds($31 billion) to British taxpayers, said it would pay a dividendof 0.75 pence for the 2014 financial year.
Chief Executive Antonio Horta-Osorio said Lloyds, whichoffered some of the highest dividends in Britain before thecrisis of 2007-2009, intended to pay out at least half of itssustainable earnings in the medium term.
Lloyds reported an underlying profit of 7.8 billion pounds,up from 6.2 billion the year before and ahead of marketexpectations for a profit of 7.5 billion pounds.
The bank said its core Tier 1 ratio, a key measure of itsfinancial strength, rose by 250 basis points to 12.8 percent.
"Today's results are another major milestone in the recoveryof the British economy from the great recession and the bankbailouts," said Britain's finance minister George Osborne.
The government will receive a dividend of 130 million poundswhich Osborne. It had already raised nearly 8 billion poundsfrom the sale of shares in the bank, reducing its stake to below24 percent.
Horta-Osorio said paying a dividend would help thegovernment sell its remaining shares because the stock would nowbe bought by dividend-seeking funds. Such investors accountedfor over a quarter of Lloyds' shareholder base prior to itsbailout.
"We believe that the dividend will be very important inenabling the government to reduce its stake at an even quickerpace," he said.
Lloyds' last payment to shareholders was an 11.4 pence pershare dividend for the first half of 2008, paid out in Octoberof that year.
Lloyds is further along the road to recovery than itsbailed-out rival Royal Bank of Scotland, which onThursday reported a hefty 2014 loss.
RBS's turnaround has been hampered by investigations intopast misconduct and a sale of the government's 79 percent stakeremains some way off.
CEO PAY PACKAGE CRITICISED
Shares in the bank rose 0.8 percent to 79.2p by 1620 GMT.
Horta-Osorio has turned Lloyds around since becoming itschief executive in 2011, simplifying the business and slimmingdown to focus on lending to British households and businessesand meet tougher regulatory rules on capital.
But Labour lawmaker John Mann, who sits on parliament'sTreasury Select Committee criticised the bank for handingHorta-Osorio a pay package for 2014 worth 11.5 million pounds.
"It's obscenely high. Why's he getting so much and thetaxpayer so little?," Mann told Reuters.
Horta-Osorio also said he would accept shares worth about 7million pounds awarded under a plan set out in 2012, but wouldnot sell them until the government has sold more shares.
Lloyds said it paid staff 370 million pounds in bonuses for2014, down 4 percent from 2013. Top managers were handed bonusesworth 30 million pounds.
"People will be rightly taken aback by the huge scale of thebonuses being paid," said Labour lawmaker Cathy Jamieson, theparty's spokeswoman for financial affairs.
Meanwhile, the Treasury on Friday apologised for incorrectlystating in a letter that Britain's financial regulator hadgranted Lloyds permission to buy back bonds issued to strengthenits capital in 2009 at face value. In fact, the regulator hasyet to make a decision.
The issue is sensitive because the bonds, which currentlytrade at a premium to their issue price, are held by thousandsof private retail investors. ($1 = 0.6479 pounds) (Additional reporting by Steve Slater; Editing by SineadCruise, Keith Weir and Susan Thomas)
