Share Centre opinion28 Aug 2018 21:04
Is a whopping dividend sufficient reason to buy Lloyds?
Lloyds bank finally completed its split from TSB three years ago, and has been fully free from government share holding for a year. Is it a good investment?
Article updated: 28 August 2018 9:00am Author: Michael Baxter
The case for is simple. At the current share price, dividends are expected to be worth around six per cent next year. Dividends have also been steadily rising since its first dividend payment in years, announced in early 2015 as part of the results for the year 2014. Profits have been rising too, and while dividends seem appealing, they are amply covered by profits.
The case against is a little more complex.
For:
To put the dividends in context, it may be worth some detail.
The bank revealed its first dividend payment since that disastrous period when the UK government took a 43 per cent stake in the bank, as part of its performance for 2014.
The dividend performance since has been as follows:
2014: 0.75p
2015: 2.25p plus 0.5p special dividend
2016: 2.55p plus 0.5p special dividend
2017: 3.05p
2018: 3.43 — estimated
2019: 3.66 — estimated.
Pre tax Profits have risen nicely too:
2013: £415 million
2014: £1,762 million
2015: £1,644 million
2016: £4,238 million
2017: £5,275 million
Projected earnings per share for this year are expected to be around 2.2 times dividends.
So far, a happy story.
The share price
The share price has told a different story. It is down by a third since the spring of 2015 — at roughly the time when TSB was fully separated from Lloyds.
The share price is down by a sixth in the last five years and also down by a similar amount since May last year when the government finally rid itself of all of its remaining shareholdings in the bank.
A bit of ideology
We may want to pause for a moment and ask how the tax payer has done from the sales of the shares? Since the share price has been higher than it is now for most of the five years that the government has been selling shares it could be said that from the perspective of today, it has done pretty well.
Then again, considering the government can borrow at less than one per cent, and dividends are much higher than that, one could say it should have held.
I am not a fan of the government selling shares for ideological reasons — and worry sometimes that it sells its shares for political rather than sound financial reasons.
The big blot
Of course Lloyds’ biggest weakness in recent years has related to PPI — and the massive compensation it has paid out. Is that drawing to an end? It should be, but these things have a nasty habit of surprising and who knows what banking scandal lurks around the corner.
Against:
The problems relate to what seems like a relatively high valuation to net assets, regulation, the cost of digital transformation and weakness of the UK economy.
Unlike Barclays and RBS, it is worth more than its tangible net asset
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