Over the last 10 years, Lloyds Banking Group (LSE: LLOY) has worked hard to rebuild its reputation as a low-risk income stock.
In this piece, Ill give my verdict on todays 2018 results and explain whether Id buy the banks stock.
A solid performance
The banks after-tax profits rose by 24% to 4.4bn last year, while revenue rose by 2% to 17.8bn.
Lending growth slowed and both mortgage and credit card lending was broadly unchanged last year. However, lending to small- and medium-sized businesses grew, as did motor finance. The group also reported a sharp increase in loans to wealthy customers.
Much more profitable
When profits rise faster than revenue, it normally means a companys profit margins have improved. Thats whats happened here. Lloyds net interest margin a measure of lending profit rose from 2.86% to 2.93%.
Alongside this, tight control of costs saw the banks costs, measured as a percentage of revenue, fall from 51.8% to 49.3%.
The end result was that the bank delivered a return on tangible equity of 11.7%, up from 8.9% in 2017. This is a key measure of profitability for banks and Lloyds performance is much better than key rivals.
Rival bosses will be green with envy
I apologise for these rather dry figures but for banking investors theyre pretty impressive.Certainly the bosses of rivals such as Barclays and RBS may feel slightly envious today. Both men are still struggling with costs that account for more than 60% of their banks income, and returns on tangible equity of less than 5%.
Barclays and RBS may offer an interesting opportunity for value investors, but for income investors, todays figures confirm my view that Lloyds is probably still the safest buy in British banking.
Focus on shareholder returns
Some shareholders may be disappointed that despite the banks earnings per share rising by 27% 2018, the dividend has only been lifted by 5%.
Instead of returning more cash to shareholders directly, the bank has decided to return cash through a 1.75bn share buyback. This equates to an extra 2.46p per share. Combined with the 3.21p dividend, it will take total shareholder returns for 2018 to 5.66p, or around 9.4%.
Thats not to be sniffed at. But the problem with buybacks is that unless you sell your shares, you dont see any extra cash in your pocket. So why is Lloyds chief Antnio Horta-Osrio buying back shares instead of hiking the dividend?
I suspect the answer has two parts. Firstly, the current dividend provides a yield of almost 5.4%, which is probably high enough to attract income investors.The second reason is that by returning surplus cash through buybacks, Horta-Osrio is laying the groundwork for an uncertain future.
If Lloyds has fewer shares in circulation, then it will be easier for the bank to generate earnings per share growth and to increase its dividend, even if profit growth slows.
Is this the right time to buy?
Lloyds last-seen share price of 61p values the stock at about 1.1 times its tangible net asset value.The dividend yield of 5.4% looks tempting to me and buybacks should ensure that theres still room for dividend growth, even if profits are flat this year as forecasts suggest.In my view, these shares remain a dividend buy.
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