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A Closer Look at Lloyds Banking Group PLC (ADR) (LYG)’s Dividend Potential

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Lloyds Banking Group PLC (ADR)LONDON — Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of Lloyds Banking Group PLC (ADR) (NYSE:LYG) and assessing whether the company is an appetizing pick for income investors.

How does Lloyds Banking Group’s dividend history stack up?

2009 2010 2011 2012
FY Dividend Per Share 0p 0p 0p 0p
DPS Growth
Dividend Cover n/a n/a n/a n/a

Source: Lloyds Banking Group Company Accounts.

Lloyds Banking Group PLC (ADR) (NYSE:LYG) was forced to terminate its dividend policy in 2009 owing to European state aid rules following its bailout from the British taxpayer in the aftermath of the 2008-2009 financial crisis. The company has stated that it is hoping to start doling out shareholder payouts again sooner rather than later, however, with an improving earnings outlook and better balance sheet boosting dividend prospects.

What are Lloyds Banking Group’s dividends expected to do?

2013 2014
FY Dividend Per Share 0p 1p
DPS Growth
Dividend Cover n/a 3.1x
Dividend Yield 0% 1.7%

Source: Investec.

Broker Investec expects the bank to return to positive earnings growth this year, with losses per share of 2 pence expected to swing to earnings per share of 2.7 pence in 2013. This is anticipated to advance to 3.1 pence in 2014. Chancellor George Osborne is expected to announce his plans for the government’s 39% stake in the bank at his Mansion House speech next month.

Lloyds Banking Group PLC (ADR) (NYSE:LYG) is not expected to return cash to shareholders via dividends in the current 12-month period, however, although Investec anticipates that the bank will begin providing nominal dividends from next year.

Lloyds Banking Group PLC (ADR) (NYSE:LYG) announced last month that profit before tax increased to 2 billion pounds in the January-March period, a vast improvement from the 280 million-pound profit recorded in the corresponding 2012 period. The bank has been boosted by a severe reduction in impairment charges and ambitious cost-cutting program, while massive divestments such as the recent sale of shares in St. James’s Place have boosted the balance sheet.

How does Lloyds Banking Group’s dividend prospects rate against the competition?

Prospective Dividend Yield Prospective P/E Ratio
Banks 3.7% 13.1
FTSE 100 3.1% 16.3

Source: Digital Look.

Lloyds Banking Group PLC (ADR) (NYSE:LYG) was recently dealing on a P/E rating of 22.2 for 2013, far in excess of its banking peers as well as the broader FTSE 100, while its dividend prospects are also measly in comparison with both groups.

I believe that Lloyds falls some way short of a plucky dividend pick for investors. The bank’s financials have improved markedly in recent times, and its massive U.K. retail operations should drive growth higher in coming years.

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