After nearly seven years of waiting, it seems as ifLloyds(LSE: LLOY) (NYSE: LYG.US) is finally set to restart dividend payouts this week a sign that the banks turnaround is finally starting to yield results.
The dividend announcement is expected to come on Friday when Lloyds unveils its full-year 2014 results. However, the payout isnt expected to amount to much.
Indeed, City analysts are expecting a token dividend of 0.5p to 1p per share, which will cost the bank roughly 713m.A payout of 1p per share would equal a dividend yield of 1.3%.
And based on analysts expectations, a dividend payout totalling 713m will amount to just under 40% of the banks full-year 2014 profit. Analysts are expecting the bank to report a profit of 1.9bn for 2014.
Lloyds last dividend payment was made during August of 2008, only a few weeks before the bank was bailed out by the UK taxpayer.
Nevertheless, Lloyds recovery it seems is now well under way and investors should be looking to the future, not concentrating on the banks shady past.
For example, Lloyds tier one capital ratio financial cushion is expected to have risen to 12.1% by the end of last year, up from 10.3% as reported at the end of 2013. A tier one ratio of 12.1%makes Lloyds one of the best capitalised banks in Europe.
Whats more, in order to officially declare a dividend payout, Lloyds will have to receive approval from the Bank of Englands Prudential Regulation Authority.
The PRA will only allow a dividend payout if theybelieve that Lloyds annual results,five-year operating plan and its capital strength are sufficient to ensure that the bank is not throwing cash away.
In other words, if Lloyds does announce a dividend at the end of this week, investors can be sure that the bank has a clean bill of financial health.
A token dividend payout of 0.5p to 1p per share may not seem like much but it is a start for Lloyds.
Whats more, over the long term, City analysts believe that the bank will pay out 50% of profits to shareholders as a dividend. And based on this prediction, the bank is set to support a dividend payout of 4p per share during 2016, a yield of 5.2% based on the banks current share price.
In addition, according to my figures,Lloyds is severely undervalued in comparison to its banking sector peers. Specifically, the bank is currently trading at a forward P/E of 9.7, compared to the banking sector average of around 25.
If Lloyds valuation were to move in line to that of its peers, the banks shares could be worth up to 200p each by 2016 a gain of 152% from current levels.
The bottom line
So overall, Lloyds looks to offer the perfect blend of both income and growth. But don’t just take my word for it, I strongly recommend that you do your own research before making any trading decision — you may come to a different conclusion.
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