Lloyds Banking Group (LSE: LLOY) paid a dividend of 2p per share for 2021. Repeated this year, that would yield 4.5% on the current share price. What are the chances of the Lloyds dividend being raised again in 2022?
At 2021 results time, the bank said the dividend payment was in line with its “progressive and sustainable ordinary dividend policy”. So that’s positive for a start.
Interest rates
Soaring inflation is driving up interest rates. That’s bad for borrowers, but it’s good for lenders. Super-low interest rates had left Lloyds, the UK’s biggest mortgage lender, with squeezed profit margins. But the outlook is improving.
There are potential downsides to higher interest rates for Lloyds shareholders though. The bank enjoyed a healthy impairment credit in 2021, after much of the cash set aside for bad debts during the pandemic was not needed. We now need to watch out for new bad debt problems spurred by higher interest rates.
An inflationary environment is bad for the Lloyds dividend too. A 4.5% yield would be wiped out, and more, by inflation running at 7%. Still, today’s inflation is hopefully short term. And on the whole, rising interest rates are good for the Lloyds outlook.
Earnings growth
For the Lloyds dividend to remain progressive and sustainable, earnings must grow. I think that’s well on the way to happening, though Lloyds’ prospects are still clouded by uncertainty.
The jump in 2021 earnings per share was boosted by that impairment credit. And right now, it’s hard to gauge Lloyds’ underlying earnings growth potential.
At results time, the bank spoke of “improvements to the macroeconomic outlook for the UK”. But that was before the Russia, Ukraine crisis. It does seem as if every time Lloyds looks like it’s emerging from the most recent crisis, the world throws another one at it.
I remain confident of long-term earnings growth at Lloyds. But the short term, and 2022 specifically? I just don’t know.
Balance sheet strength
For sustained Lloyds dividend growth, we’ll need balance sheet strength. That’s been the focus of the Bank of England stress tests since the financial crisis. And it would be unthinkable now to prioritise dividends ahead of liquidity.
But the 2021 balance sheet was looking good. Lloyds announced “an ordinary share buyback programme of up to £2bn, given the strong capital position of the group”.
The Lloyds board, presumably, does not see much risk of an impact on dividends for 2022 and beyond. But again, that was before Russia and Ukraine.
Still, even with the current geopolitical and economic risks, I don’t see any liquidity problems holding back a further Lloyds dividend increase in 2022.
A Lloyds dividend fall?
Despite my overall optimism, I do still see downside risk for Lloyds dividend investors. And we remain some way from pre-pandemic dividend levels. But I do actually like the bank’s conservative approach right now, as I think it provides a better bedrock for long-term shareholder income.
I see the chance of a drop in 2022 as slim. But a raise is by no means assured. I’m holding.