I have been covering the Lloyds (LSE: LLOY) share price now for over a decade. During this time, the bank has been transformed but has also had to deal with some significant headwinds. The low-interest-rate environment, PPI compensation, and the coronavirus pandemic have all had an impact on the group.
Nevertheless, notwithstanding these challenges, the banking company is stronger today than it has been for a long time. The group has emerged from the pandemic in a stronger position than when it went in. Despite booking substantial loan losses, these charges have been nowhere near as bad as expected.
In addition, the booming demand for mortgages has produced windfall profits for the company. On top of these factors, regulators’ restrictions on dividends meant that Lloyds could not pay out its profits to investors and, as a result, its balance sheet is now stuffed with cash.
Lloyds share price potential
This is what I think the market is missing about Lloyds. Rather than focusing on its potential to return cash to investors, the market seems to be focusing too much on the risks the group is facing.
As one of the largest lenders in the UK, Lloyds is a bellwether for the country’s economy. I think it is fair to say that right now, the economy is facing some significant challenges, and these could have an impact on Lloyds.
However, as I have tried to explain above, the banking group has seen several crises over the past decade, and it has managed to navigate every one. Of course, investors should never use past performance to guide future potential. There is no guarantee the organisation will be able to navigate the next crisis. Still, I think the lender’s prospects are far brighter today than they were a decade ago.
And as the group recovers from the pandemic, I think it can become a dividend champion.
Income stock
Historically, Lloyds has paid around 50% of its earnings to investors via dividends. It has also returned cash with share buybacks, although I will not include these cash returns in my calculations for the sake of simplicity.
According to City projections, Lloyds’ earnings per share could rise to 8.2p by 2022. A payout ratio of 50% suggests a potential dividend of 4.1p, based on these projections, or a dividend yield of 8.2% on the current share price.
This is just a back-of-the-envelope-style calculation. There is no guarantee the shares will ever offer this level of income. Nevertheless, I think it highlights what the market is missing about the business. It has tremendous potential as a dividend stock, and that is why I like the shares.
Therefore, I would buy shares in Lloyds as a dividend investment for my portfolio today, as the company recovers from the pandemic and looks to the future.
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Rupert Hargreaves has no position in any of the shares mentioned. 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.
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