Lloyds needs to embrace its dividend yield potential - AJ Bell

Added 18th May 2016

Lloyds Banking Group could unlock potential by rebranding itself as an income stock, if only it cleans up its act, according to Russ Mould, investment director at AJ Bell.

Lloyds needs to embrace its dividend yield potential - AJ Bell

Economic secretary to the Treasury, Harriett Baldwin, said in a statement on Tuesday that the government was “determined” to capitalise on the success of recovering 80% of its investment in Lloyds “by making Lloyds shares available to the public this year.”

The £130m dividend payment confirmed on Tuesday brought the total value of taxpayer money recovered from Lloyds to over £16.8bn.  

Mould said in a statement Wednesday the government’s announcement “will again have investors pondering whether the bank stock is suitable for their portfolios.”

Not least of all because the “banks sector is still the very worst performer (out of 39) in the FTSE All-Share this year to date.” It also doesn’t help that Lloyds is “unlikely to offer much by way of earnings growth” simply by nature of the type of regulated, competitive market it operates within.

Mould asserted that Lloyd’s has the “potential to establish itself as an income stock at a time when many investors are hungry for yield.”

Assuming that the bank keeps dividends at 4.44p per share and Lloyd’s share price is 68p, analysts predict that it will be the fifth-highest yielding FTSE 100 stock.

Further projections made by analysts revealed that Lloyds could be the fifth-highest payer of dividends in actual cash terms in 2016, yielding approximately £3.7bn.  

The challenge for Lloyds in making the most of its potential to return healthy dividend yields to shareholders is to undergo a major rebranding exercise, said Mould.

Mould emphasised that the bank not only needs to “build a reputation as a reliable dividend payer” but also assure investors that it is on the road to becoming an “old-fashioned, low-risk, utility-style bank.”

He also advised Lloyds to “keep a lid on PPI and any other claims for misbehaviour, manage bad loans and impairments as best it can and hope the UK housing and mortgage markets remain healthy.”

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