With a dividend yield of around 6%, Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) is currently one of the highest-yielding shares in the FTSE 100.
This surprises me. After all, the company appears to be in good financial shape at the moment. For instance, it has a cost to income ratio which is one of the lowest among large-cap UK banks. It has been able to achieve this through a period of headcount reduction as well as process improvements.
Additionally, Lloyds has a much-improved balance sheet in my opinion. It has made asset disposals and also acquired MBNA recently. They could improve its risk to return ratio and may lead to higher profitability. And after passing recent stress tests, it seems to be in a relatively strong position.
However, investors do not yet seem convinced. The company’s share price continues to trade at around 67p, which gives it income appeal in my opinion.
The Lloyds dividend may be so high at the moment because of uncertainty surrounding Brexit. At the time of writing there is an impasse in the talks between the UK and the EU. The Irish border seems to be a sticking point and while all sides are apparently upbeat about a solution, it could cause UK-focused stocks to come under some pressure.
As time ticks by, the prospect of a no deal between the UK and EU increases. The potential impact in the short run of such a scenario could be significant disruption. Sure, in the long run it may not be a bad thing, but it could cause further uncertainty in the months and years ahead.
Therefore, it wouldn’t surprise me if the Lloyds share price and dividend yield remained at current levels for a little while. In the long run, though, I feel the bank has significant upside potential and strong income investing appeal.