A number of UK banks are currently returning billions of pounds to investors via share buybacks. And they’d hardly be doing that if they thought their shares were overvalued. In addition, I like the look of banking dividend forecasts right now.
First-half reporting season for the financial sector is just about upon us, so I thought I’d take the opportunity to find out what the dividend outlook is like now.
The banks were, after all, among the first to cut their dividends during the Covid-19 pandemic. And judging by their share prices during the latest economic crisis, investor sentiment in the sector is weak.
Dividend forecasts
Here’s a table of the big four UK retail banks listed on the FTSE 100:
| Bank | Historic yield | Forecast yield | Historic P/E | 12-month price | 5-year price | H1 results |
| Barclays | 3.2% | 4.8% | 4.5 | -5% | -22% | 28 July |
| Lloyds | 4.2% | 5.4% | 6.2 | -5% | -36% | 27 July |
| NatWest Group | 4.7% | 5.8% | 8.6 | +14% | -8% | 29 July |
| HSBC Holdings | 4.1% | 5.5% | 11 | +28% | -30% | 01 Aug |
On the face of it, that looks like a selection of banks are on very low price-to-earnings (P/E) ratios. HSBC is a bit of an exception, with so much of its business focused in in China. But other than that, they’re on valuations of around half the FTSE 100 average P/E, or less. And even HSBC is below average.
All of them are forecast to pay higher dividend yields than the overall Footsie this year. The index average currently stands at around 3.9%, which itself I find attractive.
Risky yields?
The big risk, though, lies in the reason for these attractive yields. A yield can look good if the cash payout is rising. Or if the share price is falling. And the banking sector is under a squeeze this year as inflation is soaring amid a global economic crisis.
Still, at least there’s one good thing about rising interest rates. They might not be good for borrowers, but they’re happy news for banks. A higher base rate gives a lender more room for better lending margins.
There’s one big question I want answered — are bank dividends going to be at least maintained this year? The companies won’t be able to answer that right now. But their upcoming first-half results releases should hopefully give us some clues.
Progressive dividends
As of its Q1 update, Barclays was still speaking of a “progressive ordinary dividend”. Lloyds didn’t say much about its dividend at all, but its cash situation looked healthy enough to me.
If there’s any hint of any dividend cuts for 2022, or even any signs of cash flow concerns, I could see banking shares taking another dip. But these four banks have all been among those purchasing their own shares as part of their capital redistribution. And I think that bodes well for the remainder of the year.
Rght now, I’m feeling upbeat about the chances of today’s banking dividend forecasts coming good.