A Closer Look At Lloyds Banking Group Plc's Dividend Potential


Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) and assessing whether the company is an appetising pick for income investors.

How does Lloyds Banking Group's dividend history stack up?

FY Dividend Per Share0p0p0p0p
DPS Growth----
Dividend Covern/an/an/an/a

Source: Lloyds Banking Group Company Accounts

Lloyds was forced to terminate its dividend policy in 2009 owing to European state aid rules following its bailout from the British taxpayer in the aftermath of the 2008/2009 financial crisis. The company has stated that it is hoping to start doling out shareholder payouts again sooner rather than later, however, with an improving earnings outlook and better balance sheet boosting dividend prospects.

What are Lloyds Banking Group's dividends expected to do?

FY Dividend Per Share0p1p
DPS Growth--
Dividend Covern/a3.1x
Dividend Yield0%1.7%

Source: Investec

Broker Investec expects the bank to return to positive earnings growth this year, with losses per share of 2p expected to swing to earnings per share of 2.7p in 2013. This is anticipated to advance to 3.1p in 2014. Chancellor George Osborne is expected to announce his plans for the government's 39% stake in the bank at his Mansion House speech next month.

Lloyds is not expected to return cash to shareholders via dividends in the current 12-month period, however, although Investec anticipates that the bank will begin providing nominal dividends from next year.

Lloyds announced last month that profit before tax increased to £2bn in the January-March period, a vast improvement from the £280m profit recorded in the corresponding 2012 period. The bank has been boosted by a severe reduction in impairment charges and ambitious cost-cutting programme, while massive divestments such as the recent sale of shares in St James's Place have boosted the balance sheet.

How does Lloyds Banking Group's dividend prospects rate against the competition?

Prospective Dividend YieldProspective P/E Ratio
FTSE 1003.1%16.3

Source: Digital Look

Lloyds was recently dealing on a P/E rating of 22.2 for 2013, far in excess of its banking peers as well as the broader FTSE 100, while its dividend prospects are also measly in comparison with both groups.

I believe that Lloyds falls some way short of a plucky dividend pick for investors. The bank's financials have improved markedly in recent times, and its massive UK retail operations should drive growth higher in coming years.

However, the firm still remains expensive when tallying up future earnings. And while Lloyds is anticipated to resume paying dividends in the medium term, this has yet to be confirmed, and any payout resumption is likely to register at low levels.

Multiply your investment income with the Fool

Although I believe Lloyds Banking Group is not an appetising dividend selection at present, there are plenty of other FTSE 100 winners available to really jump start your investment income. So check out this brand new and exclusive report covering a multitude of other premium payers right now.

Our "5 Dividend Winners To Retire On" wealth report highlights a selection of tasty stocks with an excellent record of providing juicy shareholder returns. Among our picks are top retail, pharmaceutical and utilities plays which we are convinced should continue to provide red-hot dividends. Click here to download the report -- it's 100% free and comes with no obligation.