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View the article online at http://citywire.co.uk/wealth-manager/article/a734627

Jupiter's Davies: three reasons why Lloyds' dividend may beat forecasts

by Steve Davies on Feb 17, 2014 at 15:25

This back-to-basics approach is reflected in the bank's outlook.

When we were setting out the case for investing in Lloyds three years ago, we estimated the bank might eventually be in a position to pay a dividend of 5-6 pence a share - a pay-out that would in our view support a share price in the region of £1 or more.

Yet, Lloyds, at the presentation of its full-year results, told investors it now believes it could be quite capable, two years from now, of generating 2% of excess capital a year even after retaining the capital they need to fund any growth in the business.

For a bank with a balance sheet of around £300 billion, this would equate to around £6 billion a year of capital generation. More importantly, for a Lloyds shareholder, it suggests the bank could be in position to distribute as much as 8 pence a share in dividends and share buybacks in years to come.

Given this, a share price of 140-150 pence for Lloyds looks a plausible aspiration for the patient long term investor.

Steady growth

Finally, under the current regulatory climate, UK banks are increasingly likely to have the sort of growth characteristics more typical of a utility company although arguably retaining a higher risk profile.

Slower, steadier growth means a bank like Lloyds will not need to hold back as much as of its profit to fund future growth, boosting instead the amount it can re-distribute via dividends to its long-suffering shareholders.

It also means the bank may have more money at its disposal to buy back shares, including possibly part of the 33% stake still owned by the UK government.

Whilst the overall outlook for Lloyds remains rosy, there are potential headwinds.

Potential Headwinds

Uncertainty over the outcome of the UK general election in 2015 and Labour's talk of a 25% market share cap for UK banks do cast a shadow.

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