Since Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) relies on the UK for the majority of its income, Brexit could have an impact on its prospects in my view. Consumer and business confidence remains relatively weak in my opinion, and this could lead to increasingly challenging operating conditions over the medium term.
Of course, the bank has become a more appealing income share in recent years in the eyes of some investors. It has a 6% dividend yield at the moment, thanks in part to its falling share price of recent months.
Over the next financial year, it is expected to grow dividends per share from 3.4p to around 3.6p, which would equal a rise of around 6%. That’s 2.5x inflation, and could be relatively appealing versus the dividend growth prospects of other UK-focused companies.
However, given the potential uncertainty which Brexit could cause, the prospects for the Lloyds dividend may be viewed as relatively difficult to predict at the moment. A downturn for the UK economy may cause confidence to fall, and this could hurt a number of UK-focused shares in my view.
The bank, though, is forecast to have a dividend payout ratio of 47% in 2019. In my view, this seems to be relatively affordable, given its forecast levels of profitability. Sure, a downgrade in its financial outlook could reduce headroom when dividends are paid, but I feel that they are at affordable levels given the current outlook.
In fact, in the long run I wouldn’t be surprised if Lloyds is able to increase dividends at a relatively fast pace. Although Brexit could cause some disruption for UK-focused shares in the near term, I believe that the bank has a sound growth strategy which could help to catalyse its EPS growth over future years. As a result, I’m cautiously optimistic about its income investing prospects.