Interactive Investor

Lloyds flags special dividend policy

31st July 2015 12:37

Lee Wild from interactive investor

Half-year results from Lloyds Banking Group gave out mixed messages. On the one hand, second-quarter numbers were largely positive, with a sharp drop in impairments meaning underlying pre-tax profit of £2.2 billion beat consensus estimates by 13%. Hopes are high of special dividends, too. Yet a "disappointing" £1.4 billion charge for payment protection insurance (PPI) mis-selling was larger-than-expected, and the high street bank' s CET1 ratio, a measure of balance sheet strength, was shy of forecasts.

That huge PPI provision took the total bill for the scandal to £13.4 billion and optimises the final chance to provide for redress on a tax-deductible basis, according to analysts. Even after adding £660 million of TSB disposal costs reported profit for the six months ended 30 June still grew 38% to £1.2 billion. Strip out those fines and one-off costs, and Lloyds made nearly £4.4 billion, up 15% - impairments plunged by 75% and total income rose 2% to almost £9 billion.

Lloyds' common equity tier 1 (CET1) ratio of 13.3% just missed City estimates of 13.7%. However, that still compares well with peers, and chief executive António Horta-Osório is at pains to point out that Lloyds is "a low-risk bank". And after paying an interim dividend of 0.75p a share, the boss says surplus capital - amounts in excess of 12% CET1 plus a further year's ordinary dividend - will be returned to shareholders either through special dividends or share buy-backs. It may be 2017 before we see the first specials, say experts.

(click to enlarge)

And fixing the bank has allowed the government to sell down its stake by two-thirds to less than 15%. A retail investor share offer promised by chancellor George Osborne is widely expected next March following the company's full-year results.

Then, Lloyds expects full-year net interest margin will have improved to around 2.6% and believes that other income will be "broadly stable" in 2015.

Lloyds trades on about 1.6 times tangible net asset value (TNAV) per share of 53.5p, Investec Securities is not impressed though. "The underlying picture is not stellar," moans analyst Ian Gordon. He thinks the current share price is about right, so keeps his 'hold' rating and 86p price target.

Gordon prefers Royal Bank of Scotland and Virgin Money.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.