With the Lloyds Banking Group PLC (LON:LLOY) (LLOY.L) share price having declined by almost 25% since May, the bank now has a dividend yield of 6.6%. That’s around 220 basis points higher than the FTSE 100’s yield, and makes it one of the highest-yielding large-cap shares around at the moment.
In the next financial year, the bank is expected to deliver a rise in dividends per share of over 7%. This may come as a surprise to some investors, since UK-focused shares may experience an uncertain outlook due to Brexit. As a result, it could be assumed that they will adopt an increasingly cautious attitude towards how capital is used, and may decide that retaining capital is a better idea than increasing dividend payments.
In Lloyds’ case, its forecast dividend growth in 2019 would mean that it has a payout ratio of around 48% using next year’s anticipated EPS figure. In my view, this appears to be relatively affordable, and provides the company with headroom should its financial performance disappoint versus forecasts.
In the medium term, I believe that the bank could deliver improving financial performance. I feel that it has a sound strategy which is allowing it to become increasingly efficient at a time when the UK banking sector is undergoing rapid change. Customers are visiting branches less often, but are expecting greater flexibility from their bank in terms of digital opportunities. Therefore, the company’s decision to invest £3 billion in digital growth could be a good move in my opinion.
Sure, Brexit could be a disruptive force in the near term. Ultimately, though, nobody knows quite how it will progress. While this could mean that investors continue to adopt a cautious stance on UK-focused stocks such as Lloyds, I think that in the long run the company’s single-digit P/E ratio and improving dividend prospects could help it to outperform the wider index.