The Lloyds (LSE: LLOY) share price is bouncing back from a tough 2020. The price has soared approximately 25% year to date, from 35p to 44p. And it’s up from just under 30p a year ago.
But while my Foolish colleague Cliff D’Arcy thinks that Lloyds will continue to have a great 2021, I have concerns. Especially regarding the implications of its upcoming ex-dividend date.
What is ex-dividend?
Ex-dividend describes a stock that is trading without the value of the next dividend payment. The ex-dividend date is the day the stock starts trading without the value of its next dividend payment.
That means if a Lloyds investor bought the stock before the ex-dividend date, they would be entitled to the bank’s final dividend of 0.57p per share. This is the maximum dividend payment amount permitted by banking regulators in Britain. However, if they were to buy the stock later, they wouldn’t be entitled to the bank’s final dividend.
The ex-dividend date for the final dividend has been set as today, April 15, with the record date — the date by which investors must be on the company’s books in order to receive the dividend — set for tomorrow.
Lloyds is set to pay that final dividend on May 25.
What this payment means for Lloyds investors
Though I think Lloyds is in for some volatility this week, ex-dividends aren’t a long-term concern. Volatility happens because dividends are typically paid in cash and in such a case, represent a distribution of retained earnings. Ultimately, dividends paid could make up a small or large percentage of a company’s overall market value and therefore trigger differing levels of volatility on the ex-dividend date.
For now though, there are more pressing concerns regarding Lloyds as an investment that I wish to address.
Should Lloyds investors be concerned?
Lloyds had a poor 2020 as profits fell 70% year-on-year to £1.2bn. I believe this was to be expected, especially at a time of ultra-low interest rates. Lloyds generates revenue by taking deposits and lending funds. Low interest rates mean lower returns.
Another concern is an increase in the average British person’s savings. By the end of 2020, average savings had increased 25% to 15.6% of disposable income. This savings glut will add £180bn to UK household savings in the five quarters to June 2021. But this wave of deposits isn’t good news for banks, which will struggle to lend people money profitably. It seems, Britain’s new-found love of saving could actually act as a drag on the Lloyds share price.
Despite this, Lloyds investors will be pleased with the company share price’s apparent comeback in 2021. And while personal loan numbers may take a hit, business loans could be on the rise, boosting investor sentiment. As businesses reopen post-Covid, Lloyds, being one of the UK’s biggest lenders to consumers and corporates, should see higher loan growth translate into increased earnings.
Lloyds still has plenty going for it. And though I believe it will temporarily drop due to its ex-dividend date, I don’t think it will be a long-term issue. My focus is on its fundamentals, such as its loan business, and they look promising, which is why I’m keeping it on my watchlist for now.
I will wait out any potential volatility and allow the dust to settle before considering an investment when the economy fully reopens.