Lloyds' share price still has encouraging long term outlook despite chancellor George Osborne's delay

 
Laith Khalaf
BRITAIN-BUSINESS-BANKING-SECTOR-PROBE
Osborne blamed turbulent markets for the delay (Source: Getty)

The chancellor has announced that the planned sale of the government’s shares in Lloyds to the public won’t proceed until turbulent markets have calmed down.

This must be a big disappointment to the hundreds and thousands of investors who have registered their interest in the sale. But while the whole of the banking sector has been struggling in these volatile markets, the longer-term outlook for Lloyds still seems encouraging to us.

The housing market remains strong, so Lloyds’ important mortgage business ought to be doing fine. PPI is still a blot on the horizon. The FCA has proposed a 2018 time limit on claims, which could lead to a surge in cases in the near term, but this would be a one-off.

Interest rates do not look to be rising any time soon, and unemployment is falling at the same time that real wages are beginning to rise. That suggests that bad debts ought to remain modest. Competition between banks could limit net interest margins, but Lloyds has an ongoing cost-reduction programme to support profits.

Read more: Lloyds share sale - should you register to buy?

Lloyds’ capital ratios are strong and the fall in the share price feels like an opportunity; a lower price means a higher dividend yield in future for investors buying at today’s price.

Taking current consensus forecasts, Lloyds is offering a dividend yield of almost six per cent this year and over seven per cent next. Investors should also receive the final dividend for 2015, which will be declared in late February. Of course dividend yields are variable and not guaranteed.

Potentially, between now and May 2018, when we expect the final dividend for 2017 to actually land in shareholders’ bank accounts, there could be a total yield of 16 per cent, if Lloyds pays dividends equal to the consensus of market forecasts.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

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