With a dividend yield of around 5.7%, Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) has a significantly higher income return than the FTSE 100 at the moment. The wider index yields around 4%, while the bank is expected to yield as much as 6.1% next year as a result of dividend growth forecast for 2019.
The bank, though, may have an uncertain future ahead of it. As a UK-focused business, Brexit could have a greater impact on its prospects than is the case for a number of its index and sector peers. Given that there is currently no deal between the UK and the EU, the economic outlook for the UK may come under pressure in the near term in my view.
Added to this is the risk that Parliament will vote down a deal between the UK and the EU. This could mean that there is political and economic risk facing the country, which could lead to a period of volatility in future months in my opinion.
That said, I feel that Lloyds’ dividend is affordable at the moment. It is covered more than twice by EPS, which indicates that there is sufficient headroom even if profitability disappoints versus guidance. And with the bank having what I believe is a sound long-term growth strategy, I’m optimistic about its investment prospects over future years.
One area which I’m bullish about is Lloyds’ planned investment in cost reduction and efficiency. With the banking sector becoming increasingly competitive, I feel that investment in areas such as digital operations and branch closures could help to strengthen its position versus peers. Although it already has a relatively efficient business, further cost cuts could strengthen its position.
Therefore, while the bank may face an uncertain near-term future and offers less resilience than some of its FTSE 100 peers, I feel that in the long run it could deliver impressive total returns versus the wider sector and index.