High street lender Lloyds Banking (LLOY) falls 2.8% to 80.9p despite plans to reintroduce its dividend in the second half of the year after a five year absence. The market continues to be spooked by the rising compensation pot for its payment protection insurance (PPI) scandal, which now stands at almost £10 billion.
Many investors bought Lloyds before the financial crisis because of a generous dividend, typically yielding 7%. Investors need to understand the business and its financial circumstances have now radically changed, so dividend expectations need to be lowered.
Consensus forecasts have 2.86p per share dividend for the whole of the 2014 financial year. That would put Lloyds on a 3.5% prospective dividend yield.
The bank has shrunk since the crisis after a major restructuring has seen it retrench from its international markets to focus on retail and small business banking in the UK and exit non-core businesses, such as insurance.
The anticipated return of its dividend reflects success in strengthening its balance sheet after the tax-payer had to bail the bank out to the tune of some £20 billion following its takeover of Bank of Scotland in 2008.
Indeed, Lloyds is expected to announce a consensus-beating £6.2 billion underlying profit for 2013, making a modest statutory pre-tax profit. Its full-year results (19 Feb) are also expected to report a 3% improvement in its core lending business and a strong balance sheet reflecting a tier 1 ratio of 10.3%.
Despite this, Lloyds continues to be haunted by legacy issues which has seen it allocate a further £1.8 billion for PPI mis-selling in the final quarter of 2013. It is also paying £130 million for an interest rate hedging scandal.
The government is preparing to sell its remaining 32.7% stake in Lloyds, having already made a £62 million profit in September after selling a 6% holding for £3.2 billion.
