Simple strategy paying dividends for Lloyds
LLOYDS is an increasingly bread & butter bank – focused on high street, SMEs and consumer banking.
Some might consider that boring. But with underlying profits of £7.9billion and headline profits more than doubling to $4.2billion (£3.36billion) – largely thanks to falling PPI claims, it’s proving pretty rewarding.
Those rewards are making their way to shareholders, too. Ordinary dividends are up 13 per cent year-on-year, with the bank also announcing a special dividend of 0.5p a share.
Its success is largely down to a rigid grip on costs. Unfortunately this has meant thousands of job losses and the closure of hundreds of branches. Those low costs and a relatively low-risk portfolio of UK centric assets mean the group is able to generate bucket loads of surplus capital every year.
Normally all of that spare cash is returned to shareholders in the form of special dividends, but this year management have chosen to hang on to it a little more than usual.
That’s because the group is midway through buying the MBNA credit card business. Once that deal closes, Lloyds will have a 26 per cent share of the UK credit card market, a higher margin business than the bank’s mortgage and commercial business.
That’s the biggest potential pitfall for Lloyds though. These days it’s an almost exclusively UK focused bank and that leaves it very exposed to any problems that might appear in the UK economy.
Its newly expanded credit cards business will be particularly vulnerable to any squeeze on consumers’ wallets (credit card debts being much more susceptible to default), while the bank’s position as the UK’s largest mortgage lender means it is also exposed to UK housing. At the moment though these aren’t reasons to run for the exits. Record low interest rates mean that although they’re expected to creep up next year, default rates remain near all-time lows.
For us at least, Lloyds’ dividend paying potential (it offers a yield 5.3 per cent) means boring banking is actually quite interesting.
“This article is designed for investors who make their own decisions without advice, if unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest.”