Lloyds(LSE: LLOY) has come a long way since its 2008 bailout.
Today, the bank is arguably one of the best-managed in Europe and is almost certainly achieving some of the best returns in the European banking sector. And now that Lloyds' recovery is largely complete, the bank is beginning to return excess capital to its long-suffering shareholders in the form of special dividends as well as regular dividend payouts.
A history of capital returns
Lloyds has a history of returning the majority of its profits to investors. Indeed, before the financial crisis, Lloyds was known as one of the UK's top dividend champions, offering shareholders a high-single-digit dividend yield.
Today the bank is gradually rebuilding its dividend champion reputation.
After six years without declaring a single dividend payout, Lloyds dished out its first dividend to investors since the financial crisis during 2014. Then, for the bank's 2015 financial year, management declared an ordinary dividend of 2.25p per share and a special dividend of 0.50p, the combination being up from only 0.75p in total the year before.
It looks as if the bank is set to announce a similar increase in its total dividend payout this year. City analysts have pencilled-in a payout of 4.4p per share for 2016, a near 100% hike on last year's payout and equivalent to a yield of 6.2% at current prices. But Lloyds could decide to return even more cash to investors depending on how the UK economy performs over the next 12 months.
As one of the UK's largest lenders, Lloyds' success or failure depends on the strength of the country's economy. Over the past five years the UK's economic recovery, coupled with the housing boom, has allowed Lloyds to book some hefty profits and achieve a sector leading return on equity. However, if economic growth slows in the UK then Lloyds' income will take a hit and the bank will be forced to not only accept a lower level of profitability, but will also be faced with higher loan impairment charges.
On the other hand, if the UK economy continues to chug along a steady pace, Lloyds' profitability should remain stable and in this scenario the bank's shareholders could be set for some windfall payouts.
You see, last year Lloyds' management told the market that the bank was committed to returning excess capital to investors via both special dividends and share buybacks. In this case, excess capital is defined as capital over and above the amount Lloyds requires to grow the business and meet regulatory requirements. At present, Lloyds estimates that the minimum level of capital required for the business is around 12% (Tier one equity ratio). And at the end of the first quarter, the bank reported a Tier one capital ratio of 13%.
In other words, barring any sudden adverse shocks, Lloyds can return excess capital to investors this year.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.