Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) shareholders got a bit of good news this week when the bailed-out bank announced that it is set to resume paying dividends now that its capital position has significantly strengthened — the bank says it achieved a 2.12% net interest margin in 2013 with core loan growth of 3%, and estimated its fully loaded common equity tier 1 ratio for December at 10.3%.
Cash in 2014
Lloyds says it will apply to the Prudential Regulatory Authority to restart dividends in the second half of 2014, and intends to progressively build them back up to around 50% of sustainable earnings.
That’s not going to provide any income for the year just ended in December 2013, expected on Thursday 13 February, but we also had good news for those who are eagerly awaiting those results — Lloyds announced an underlying profit of £6.2bn for 2013, which is more than twice the previous year’s achievement and well ahead of City expectations.
Ongoing liabilities
There is, however, still a fair old wedge of cash being set aside to cover Lloyds’ past misbehaviour, with the amount based on the success rate customers are enjoying over their claims. There’s a £1.8bn provision in the fourth quarter for payment protection insurance mis-selling, and a further £130m set aside to cover the sale of inappropriate interest rate hedging products to businesses.
Back to the market
But with this apparent return to good health, Lloyds has also started the process for returning to full private ownership through a future sale of shares to the public.
Prior to this update, we had an analysts’ consensus of around 5p in earnings per share (EPS). We can’t really say yet how that £6.2bn underlying profit will translate into EPS, but it seems pretty certain that 5p is now an underestimate.
On the current share price of 80p, that 5p did indicate a price-to-earnings ratio (P/E) of about 15.7, but the real figure will be less than that now. And it’s set to fall further over the next two years as profits continue to rise to a sustainable longer-term level — pre-update estimates for 2015 suggested a P/E as low as 10.3.
Yields
What will the dividend yield? Well, some had been predicting a small payout for 2013, though that’s not going to happen now. But if the rest of the consensus proves accurate, we could be seeing yields of a little under 3% this year and better than 4.5% in 2015 — and that’s back to serious income territory.
Whatever else happens, it looks like 2014 is going to be an eventful year for Lloyds — and next week’s results are going to be well worth a little scrutiny.