Shareholders in Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) may not have long to wait until their patience is rewarded with a dividend.
The firm’s shares rose by 65% in 2013, but have flagged this year, slipping by around 6% after hitting a peaky 52-week high of 86p.
Investors who bought into Lloyds as a recovery play may already have taken profits, but for those who are seeking to lock in a long-term income, is now the right time to buy?
Valuation
Let’s start with the basics: how is Lloyds valued against its past performance, and the market’s expectations of future performance?
| P/E ratio | Current value |
|---|---|
| P/E using 5-year average adjusted earnings per share | n/a due to losses |
| 2-year average forecast P/E | 9.6 |
Source: Company reports, consensus forecasts
It’s clear that Lloyds’ shares look cheap on a forecast P/E basis, but it’s worth noting that Lloyds is already valued at a chunky 1.5 times its tangible book value of 48.5p per share.
In my view, this limits the upside potential for Lloyds’ share price, although it should not restrict potential income growth.
What about the fundamentals?
Book value isn’t the only metric Lloyds investors should be looking at.
Over the last five years, Lloyds has shrunk significantly, as it has worked hard to get rid of bad loans, now politely referred to as ‘non-core assets’:
| 5-year compound average growth rate | Lloyds |
|---|---|
| Total income | -3.9% |
| Pre-tax profit | -15.5% |
| Annual impairment charge | -30.3% |
| Net asset value per share | -3.0% |
Source: Company reports
Has Lloyds succeeded in its mission to remove all the rotten apples from its barrel of loans? The bank’s history of impairment charges — which have fallen from £16.7bn in 2009 to just £2.7bn in 2013 — suggests it may have done.
Against this backdrop, it’s not surprising that the bank’s net asset value per share has fallen by an average of 3% per year since 2009, although it would be nice to see this trend reverse soon.
What next for Lloyds?
Chief executive António Horta-Osório is determined to return Lloyds to its income-paying roots, targeting dividend payouts of 50% of sustainable earnings in the medium term.
A more modest payout of 1.26p per share is expected this year, putting Lloyds on a prospective yield of 1.7%. However, consensus forecasts suggest that next year’s payout could rise by more than 100%, to around 3.2p, putting the shares on a 2015 prospective yield of 4.3%.
In my view, Lloyds is a decent buy at today’s prices, for income-seeking investors. Shareholders who bought in at lower prices should certainly stay put, as a little patience now should be rewarded by a very attractive dividend yield on cost, when the bank’s payouts are restarted.