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Lloyds to Pay First Dividend Since 2008

THE INCOME INVESTOR: Lloyds has declared its first dividend payment in seven years - and analysts think this paves the way for a forward yield of 4%

Erin Davis 2 March, 2015 | 11:08AM

We were pleased to see Lloyds (LLOY) announce a dividend of 0.75p per share for 2014, as we had anticipated. We think this paves the way for a more material dividend for 2015 and a forward yield of around 4%. There was much to like in Lloyds' operating results as well. Impaired loans fell to 2.9% of loans, compared with 6.3% a year ago, and net interest margin improved to 2.47%, up 15 basis points year over year.

The worst news in Lloyds' fourth-quarter results – that the bank has absorbed another £0.7 billion of charges related to payment protection insurance mis-selling – was unwelcome but not unexpected. The total £2.2 billion of PPI charges in 2014 were just a hair above the £2 billion we'd projected. We plan to maintain our fair value estimate for the narrow-moat bank. We think Lloyds remains undervalued at current prices, trading at a 16% discount to our fair value estimate.

We were pleased to see meaningful improvement in Lloyds' capital levels after it barely passed the 2014 stress tests. The fully loaded common equity Tier 1 ratio rose 250 basis points year over year to 12.8%, as reductions in risk-weighted assets and good earnings performance more than offset legacy costs. Leverage also improved notably, increasing to 4.9% from a pro forma 3.8% at year-end 2013.

We think the bank's capital compares favourably with peers' and reinforces our opinion that Lloyds is well positioned to significantly increase its dividend pay-out ratio in 2015.

We think legacy issues, particularly PPI, may continue to be costly for Lloyds in 2015, but we don't expect them to have a material impact on our fair value estimate. The bank has £2.5 billion of PPI provisions available, enough to cover 12.5 months of charges at average 2014 levels, which seems close to sufficient to us. Still, our fair value estimate anticipates another £2 billion of legal and regulatory charges over the next few years, and charges around this level will not negatively affect our valuation.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Lloyds Banking Group PLC59.73 GBX1.75

About Author

Erin Davis  is a senior banking analyst for Morningstar.

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