Capital strength a cause of concern
Despite the impact of extensive streamlining and cost-cutting at part-nationalised Lloyds, the business remains on a fragile financial footing as the fallout of the 2008/2009 financial crisis continues to haunt the business.
Indeed, the banks less-than-stellar capital position was exposed again by the Bank of England this week, giving investors further cause for concern after it scraped past the European Banking Authoritys minimum CET1 ratio in November a reading of 6.2% barely surpassed the target of 5.5%.
According to Threadneedle Street, Lloyds remains susceptible to a severe economic downturn, a scenario that would assume interest rates of 6% and a 35% slump in house prices the business is by a long chalk the countrys largest mortgage provider so the news does not come as a big surprise.
Lloyds still passed the examination, of course, and is not required to re-submit its capital plan unlike high-street rival the Co-operative Bank. But a capital ratio of just 5% under adverse financial conditions barely met the minimum 4.5% requirement, hardly giving the markets reason for cheer.
Bullish broker sentiment ignoring the risks?
Despite Lloyds rocky stress test results, however, City analysts still expect the Prudential Regulatory Authority (PRA) to give the business the thumbs up to start forking out dividends sooner rather than later, and have pencilled in a final dividend of 1.1p per share for this year.
And for 2015 the number crunchers expect Lloyds to shell out a total payment of 2.9p per share, in turn creating a chunky yield of 3.8% by comparison the FTSE 100 carries a forward average of just 3.3%.
But even if the PRA allows the bank to crank its dividend policy back into action in the coming months, the scale of payouts at Lloyds could fall well short of estimates given the firms obvious need to bulk up its capital position.
Even though chief executive Antnio Horta-Osrio commented that the bank had made further significant progress in strengthening our capital position since late 2013, Lloyds still faces a multitude of problems which could whack dividend estimates, from a steady rise in legal penalties most notably from the mis-selling of PPI through to the threat of economic contagion from Europe.
Although Lloyds is undoubtedly on a stronger financial footing than that of five years ago, a consequence of an improving British economy and huge restructuring across the business, the resurrection of Lloyds dividend policy is by no means a foregone conclusion in my opinion.
Bank on a fortune with this Foolish advice
So if you are looking for stocks with sounder dividend potential than Lloyds, I strongly recommend you check out this brand new and exclusive report that singles out even more FTSE 100 winners to really jump start your investment income.
Our “5 Dividend Winners To Retire On” wealth report highlights a selection of incredible stocks with an excellent record of providing juicy shareholder returns. Among our picks are top retail, pharmaceutical and utilities plays that we are convinced should continue to provide red-hot dividends. Click here to download the report — it’s 100% free and comes with no further obligation.
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.