Rising expectations of chunky dividends over at Lloyds (LON: LLOY) have helped add fuel to the bank’s recent share price ascent.
Since pledging to return £2bn to shareholders late last month, Lloyds has seen its stock gain 12% in value.
And the bank’s supreme capital buffer indicates plenty of scope for further rises — a CET1 ratio of 13.9% (excluding dividends) as of December marks a huge improvement from a reading of 12.8% a year earlier.
City boffins certainly expect dividends at Lloyds to fly in the near term and beyond. Last year’s total payment of 2.75p per share is anticipated to rise to 4.1p in 2016, and again to 5p next year.
Consequently the bank sports gigantic yields of 5.9% and 7.1% for 2016 and 2017 respectively, smashing a wider average of 3.5% for the FTSE 100.
PPI problems
However, many believe there are plenty of flies in the ointment that could derail these sizeable projections.
First and foremost, the prospect of extra colossal PPI provisions is casting a pall over Lloyds’ balance sheet looking ahead. The business stuck away another £4bn in 2015 to cover the cost of previous misconduct, taking the total to date to a gigantic £16bn.
And although Caroline Wayman, the chief financial ombudsman, commented that “PPI complaints finally began to approach stable levels,” in 2015, she added that “we’re still seeing the volume of cases at a much higher level than many people expected.“
Still, the banking sector will be buoyed by the Financial Conduct Authority’s plans to implement a 2018 deadline on all new claims. This could lead to a rash of new claims as the cutting-off point approaches, of course, but would at least allow Lloyds and its peers to finally put the problem behind them.
Extra headwinds?
Meanwhile, Lloyds’ position as Britain’s biggest mortgage lender leaves it at the mercy of a possible collapse in the buy-to-let market.
Landlords could be forced to nurse huge losses thanks to upcoming legislative changes, from an increase in stamp duty due to start in April, through to massive changes on tax relief set to come into effect from next year.
Looking elsewhere, the result of June’s ‘Brexit’ referendum could also significantly impact Lloyds’ performance in the years ahead. A ‘leave’ vote could have a hugely-detrimental effect on the British economy, and consequently the bank’s ability to deliver stunning returns.
A stable growth star
Still, I believe there are plenty of reasons for dividend chasers to be optimistic.
Firstly, Lloyds’ vast ‘Simplification’ cost-cutting strategy continues to deliver the goods, and the bank is ahead of its target to achieve run-rate savings of £1bn by the close of 2017. The firm’s cost-to-income ratio fell to 49.3% in 2015 from 49.8% a year earlier.
On top of this, Lloyds’ decision to significantly reduce the size of the group and concentrate on the stable British retail segment significantly reduces the chances of bottom-line turbulence. While hardly good news for growth seekers, this improved earnings visibility provides a robust base upon which to build dividends