What was different about 2015? Well, it will godownas the year of the crashing dividends. FTSE 100 big boysAntofagasta,Centrica,Glencore,WM Morrison,J Sainsbury,Standard Chartered,Tescoand now Anglo Americanhave all slashed their dividend payouts this year in a brutal mass cull.
This hurts, given the relative importance of dividends to investors in todays lower growth, lower interest rate world. It also boosts the attraction of companies that are looking to raise their dividends, especially if they have the strengthto sustain them. Few companies planto hike their dividend payouts as aggressively asLloyds Banking Group (LSE: LLOY). Better still, the relatively conservative nature of its revampedbusiness should make this sustainable.
Bright Eyes
Right now, Lloyds isnt much of an income stock, yielding just 1.1%. Butits future is so bright, Im wearingshades. Today, thedividend is covered a massive 10.8 times. Expect that to shrink next year, as dividend growth goes supersonic. By the end of 2016, Lloyds is on a forecast yield of 5.1%, almost five times what you get today. Some analysts reckon it could hit 7% in a few years, wheninterest rates may stillbe at low, low levels.
Its dividend prospects were given a further boost after Lloydspassed the Bank of Englands stress testlast week. The BoEset a threshold of core tier 1 assets of 11%, comfortably below Lloyds13.7%ratio. With a healthy total capital ratio of22%, Lloyds can spend less of its cash topping up its reserves, and distribute more to shareholders.Buy now, sit tight, and let the income flow!
Big year ahead
Next year will be a biggie for Lloyds in other ways with itsretail investor flotation in thespring. By the end ofJune 2016, thebank shouldbe fullyin private hands for the first time inseven years. The taxpayersstake is already down to 9%, from 43% at the height of the crisis.
Some investors will want to wait until the share offer, buoyed bypromised discounts of at least 5%. Almost a quarter of a million people have already applied. Theres a risk to writing, as the Tell Sid-style campaign could be oversubscribed, as happened with Royal Mail. Also, the excitement could push up the share price. Dont let that put you off buying Lloyds today, if youre as positive about its prospects as I am.
The price is right
2015 has been a rough year for the Lloyds share price, which is down 11%. Thats despite posting underlying profits of 6.36bn in the first nine months of 2015, up 6% year-on-year. This has been a troubled year for markets generally, of course, and Lloyds has been hit by its PPI mis-selling hangover and other scandals. But barring accidents, these should inflict less damage in future.
Lloyds wont be a bumper growth stock. Its focus on UK retail and business banking services makesit a big fish in a medium-sized pond and the new breed of challenger banks may nibble away at its market share. Earnings per share are forecast to fall 8% next year. Butat 8.6 times earnings, the price is right. Slow interest rate growth will limit bad debts, which are nowat rock bottomlevels. With dividend payouts crashing all around it, Lloyds set to bethe incomehero of 2016.
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Harvey Jones 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.
