How Lloyds Banking Group PLC (LLOY) Might Deliver a Dividend

LONDON — I’m looking at some of your favorite FTSE 100 companies and examining how each will deliver their dividends.

Today, I’m putting the currently non-dividend-paying bank Lloyds Banking Group PLC (LON:LLOY) under the microscope.

Dividend drought
Certain conditions from the European Commission were attached to the U.K. government’s £17 billion bailout of Lloyds in the aftermath of the 2008-09 financial crisis. Among other things, the conditions meant that Lloyds Banking Group PLC (LON:LLOY) was effectively barred from paying dividends to equity holders.

However, the relevant prohibitions ceased to apply almost 18 months ago, so, in theory, Lloyds could be paying dividends today. The reality is rather different: the dividend paid on 1 October 2008 continues to be the most recent that Lloyds Banking Group PLC (LON:LLOY)’ shareholders have received.

Restart factors
A number of factors are exerting an influence on the prospects of Lloyds Banking Group PLC (LON:LLOY) resuming dividends, the main ones being: a political dimension arising from the government’s 39% stake in the bank; levels of excess capital required by regulators, and last but not least, the earnings performance of the business itself.

Lloyds Banking Group PLC (LON:LLOY)’ shares are currently trading above the government’s break-even price of 61 pence. The resumption of dividends could increase the attractiveness of the bank for potential new owners of the taxpayer’s shares. We can hope to get some clarity on the government’s position when George Osborne delivers his annual Mansion House speech on Wednesday.

The financial crisis led regulators to require banks to hold a bigger buffer of capital. Earlier this year the Bank of England upped the ante again, saying the U.K. banking sector needed to raise an additional £25 billion of capital to guard against future losses on loans. The good news for Lloyds’ shareholders is that the board has said it expects to meet the requirements from cash generated within the business and disposals of non-core assets.

Lloyds returned to profitability during the first quarter of this year — £2 billion before tax. While this was boosted by asset sales, underlying profit was, nevertheless, a healthy £1.5 billion and core underlying profit — profit from the business once targeted asset sales are complete — was £1.9 billion. It is, of course, these bread-and-butter earnings, and how they will grow, that will determine Lloyds’ future dividends.

Timing
Lloyds Banking Group PLC (LON:LLOY)‘ chief executive Antonio Horta-Osorio recently told the Daily Telegraph:

As we finish our legacy issues, the profitability of the bank is going to increase a lot in the future, and, given we don’t have a usage for those funds, it is obvious that Lloyds will be a high dividend-paying stock in the future, as it has been in the past.

The minority view among analysts is that there could be a dividend for the current year, announced with Lloyds’ preliminary results during March 2014. The majority view among analysts — and a number of unnamed ‘industry’ and ‘political’ sources cited in the financial press — is for a first dividend announcement during March 2015.

Let’s finish with a few numbers. The table below shows the high, low and consensus analyst estimates for Lloyds Banking Group PLC (LON:LLOY)’ dividends for the next two years.

	2013 Dividend	Yield on Current 62p Share Price	2014 Dividend	Yield on Current 62p Share Price
High	1.0p	1.6%	2.0p	3.2%
Low	0.0p	0%	0.0p	0%
Consensus	0.4p	0.6%	1.5p	2.4%

Source: Morningstar.

If the analysts are right — even the most bullish — Lloyds won’t be a great income story for the next couple of years. Maybe by March 2016 new investors today could be getting a reasonable yield on the 62 pence they’re paying.