The dividend and buyback potential of Lloyds Banking Group (LSE:LLOY) continues to sustain City interest after several firms reiterated their “buy” stance on the shares this week.
FTSE 100-listed Lloyds briefly dipped below 40p on Wednesday, even though third-quarter underlying profits of £2.02 billion beat the market consensus by 7% thanks to a positive surprise on bad debt provisions.
The continued lacklustre showing for shares reflected jitters over the margin outlook after Barclays (LSE:BARC) downgraded its UK guidance in results posted a day earlier.
The Lloyds net interest margin fell by six basis points over the quarter to 3.08%, a little below the 3.10% consensus. But unlike Barclays, the lender offset this decline by reporting that retail deposits grew 2% over the previous three months.
Bank of America described this as reassuring as it should support strong profitability and in turn attractive capital distributions, particularly with the company’s pension deficit now substantially closed.
The bank has a target of 58p, noting the appeal of an ongoing capital distribution yield in the mid-teens percentage.
BoA’s support is matched by counterparts at Barclays, whose analysts today highlighted a price target of 67p alongside an “overweight” recommendation.
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UBS, a long-time backer of the shares, believes they deserve to be trading at 50p as it regards Lloyds as more cash generative - and more stable - than suggested by its current valuation of six times adjusted 2024 earnings.
The bank nudged up its underlying profit forecast for 2023 by 2% due to higher income and lower impairment expectations, but has trimmed estimates for 2024/26 by 2% each year.
Its projections assume the remaining pension funding deficit of £250 million is closed in the current quarter, enabling Lloyds to declare a 2.8p a share dividend for 2023 and a buyback now worth £1.75 billion. That compares with 2.6p and £1.5 billion forecast previously and would still leave the capital buffer at 13.9%.
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The distribution is in line with capital generation targets for Lloyds to return 14-15% of its market capitalisation in the near term, rising to 18% in 2026. The next dividend payment from Lloyds is due in May, having last month distributed an interim dividend of 0.92p a share.
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Analysts at Jefferies expressed their disappointment yesterday that the bank stuck with its “stale” full-year buyback policy, having suggested recently there was room for the lender to break from the norm and declare £500 million with the quarterly results.
The City firm, which had a price target of 80p prior to the figures, noted the company is sitting on £2.4 billion of excess capital relative to its 13.5% buffer target. It believed an early move on buybacks would have helped to “catalyse the shares” in the absence of near-term upgrades to earnings guidance.
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