There’s one FTSE 100 stock that stands out as an income investment more than any other blue-chip. That’s Lloyds (LSE: LLOY).
While there are plenty of other companies in the FTSE 100 I would have no problem including in an income portfolio, Lloyds really stands out to me. That’s because this banking giant has adopted a policy of returning virtually all of its extra capital to investors.
Capital returns
Management is returning billions to shareholders through a combination of both dividends and share buybacks. Some investors might prefer dividends only, but buybacks are more flexible and still constitute a return of capital to investors. Only last week, alongside its first-quarter results, Lloyds announced a £1.8bn share buyback that was larger than many analysts had forecast.
And there could be further cash returns to come. Only a few days ago the Prudential Regulation Authority announced it was letting Lloyds hold a lower capital buffer against future risks, technically freeing up £1bn of additional capital.
Analysts are speculating that management will deploy this additional capital into buybacks, which could acquire 2.3% of the bank’s current market capitalisation. When added to the existing buyback allocation of £1.8bn, this implies Lloyds could acquire 6.2% of its market capitalisation in 2019.
In addition to the company’s share repurchases, the stock supports a dividend yield of 5.5% at the time of writing. Analysts have pencilled in a total dividend of 3.5p for 2019, up around 7.4% year-on-year.
Last year, the total dividend cost the bank around £2.3bn, and a 7% year-on-year increase implies it will distribute a total of £2.4bn to shareholders this year in dividends alone. If we include the additional £2.8bn of potential buybacks as well, Lloyds could ultimately return nearly £5.2bn of cash to investors during 2019, giving a total shareholder yield of 11.7%. This would make Lloyds easily the most shareholder-friendly stock in the FTSE 100.
Long-term trend
I expect Lloyds’ policy of returning billions to shareholders to continue for the foreseeable future. Over the past 10 years, the business has transformed itself from a basketcase into one of Europe’s leading banking institutions, and management isn’t planning on slowing down anytime soon.
In February, it informed shareholders operating costs are expected to be less than £8bn in 2019, a year ahead of its original target. And its common equity Tier 1 capital ratio — a measure of a bank’s financial strength — stood at 13.9% at the end of the year, giving it a robust balance sheet and plenty of capital.
These metrics tell me the bank can afford to continue to return almost all of its profits to shareholders through dividends and buybacks for the foreseeable future. With this being the case, I think Lloyds is going to remain the FTSE 100’s leading income champion for many years to come.
Even if the UK economy stumbles following a messy Brexit, I reckon the group’s fortress balance sheet should help it weather the storm while still rewarding shareholders. That’s why I’d buy the Lloyds share price, and that 11.7% yield, today.