Today I am explaining why Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) may not be a stunning stock candidate after all.
Here are two numbers that I think help make the case.
6.2
Lloyds petrified the market last month when it emerged battered and bruised from the European Banking Authority’s (EBA) capital stress tests. With a CET1 ratio of just 6.2% under ‘adverse’ conditions, the bank limped past the EBA’s minimum requirement of 5.5% and in turn emerged as Britain’s worst-capitalised bank.
A pass is still a pass, of course, and Lloyds could have been one of the 24 European institutions forced to raise extra capital. But the firm is far from out of the woods, and still has to face the Bank of England’s own assessments scheduled for mid-December.
And most worryingly for Lloyds, the British central bank’s ‘worst-case’ scenario assumes a 35% collapse in domestic house prices, far steeper than the benchmark used by the EBA. Given that Lloyds commands almost a quarter of all mortgages signed off in the UK, another successful outcome is certainly no foregone conclusion
3.7
The effect of Lloyds’ extensive restructuring work, combined with the buoyant bounceback of the British economy, has created expectations of dividend resumption sooner rather than later. Indeed, the bank has been engaged with talks with the Prudential Regulatory Authority for some months now over when — and to what extent — it can resurrect its dividend policy.
A formal announcement is yet to be made concerning future dividends, however, and a poor outcome to next month’s assessments from Threadneedle Street could put the buffers on any potential payout.
But even if the firm sails through the Bank of England’s capital requirements, City projections for forthcoming payouts hardly get the blood surging. The bank, as one would expect, carries a modest yield of just 1.4% for fiscal 2014 owing to it only being able to — at least potentially — fork out a final dividend of 1.1p per share.
However, payout yields at the bank remain subdued in 2015 despite the benefit of a full fiscal year — indeed, a total payout of 2.9p per share creates a readout of just 3.7%. By comparison, industry peers HSBC, Santander and Standard Chartered carry mammoth yields of 5.4%, 7.3% and 5.7% correspondingly.
Of course a return to any sort of dividend growth represents a huge milestone in Lloyds’ recovery. But for those seeking to max out their income flows, I believe there are much better banking candidates available.