One of the cheering things about 2021 for shareholders in Lloyds (LSE: LLOY) — like myself — was the restoration of the company’s dividend. But while the dividend has been brought back, it is still much lower than it had been before the start of the pandemic. So, do I think the dividend in 2022 could be bigger than it was this year?
The Lloyds dividend is back – but smaller
This year the bank announced that it had restarted its dividend. In line with other UK banks, this was because a previous dividend ban by the bank’s regulator had been lifted.
But the restored dividend was smaller than the old one had been. The latest dividend the bank paid, its interim one in September, was only around 60% of the same payout a couple of years previously. So the size of the dividends this year took some of the shine off them being restarted.
Progressive dividend policy
The bank has what is known as a progressive dividend policy. In other words, it aims to increase its dividend each year.
But, as any football fan knows, just because the manager says he will aim to improve performance next year, that doesn’t mean it will actually happen. For a company to increase its dividend prudently, its business performance also needs to get better over time.
But Lloyds had managed to increase its dividend each year in the years running up to the pandemic. If the business performance improves, I think it could increase the dividend this year and in subsequent ones, if it chooses to do so.
How big could the Lloyds dividend 2022 be?
The initial size of the restored dividend suggests that the payout may take some time to reach even its pre-pandemic level again.
Set against that, the bank has been stockpiling cash it could use to make a one-off special payment, or boost the size of its ordinary dividend. This can be seen looking at what is known as the CET1 ratio, a measure of balance sheet strength. The company targets a CET1 ratio of 12.5% and a 1% buffer. At the end of September, it reported that its CET1 ratio sat at 17.2%. That suggests that it has substantial excess liquidity. It could choose to use that to pay out higher dividends. But there is no guarantee it will do so. For example, the bank might use the funds for an alternative business purpose such as an acquisition. Or it could simply decide to maintain a CET1 ratio in excess of its target.
In theory, the 2022 Lloyds dividend could be markedly higher than 2021 and closer to the pre-pandemic payout. This could be funded either from the CET1 ratio, or an improved business performance.
Dividend risks
But the bank has not specifically indicated so far that it plans to grow its dividend dramatically.
One risk to the dividend is a declining business environment. If the housing market cools, bigger mortgage defaults could hurt Lloyds’ profits. That could dent its ability to pay a dividend.
I’m hoping for a much higher Lloyds dividend in 2022 than in 2021. But the company has not given specific guidance on which I can base that hope. I continue to hold Lloyds shares in my portfolio, but will treat any big dividend increase in 2022 simply as a welcome bonus.
The post Will the Lloyds dividend 2022 be bigger than before? appeared first on The Motley Fool UK.
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Christopher Ruane owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
