Lloyds Banking Group shares show post dividend anti climax

Where’s the rest?

Lloyds Banking Group has finally broken its near-seven year dividend drought with its confirmation this morning that its shareholders will receive an additional 0.75p for each share they own.

The problem is, it appears many shareholders had been expecting more, and that’s why Lloyds’ stock has risen less than 2% at its best this morning, despite the huge market anticipation of today’s announcement on the pay-out, and despite the bank publishing excellent full-year results too.

Regulatory capital gains

The dividend milestone was also accompanied by a strengthening of the regulatory capital position—the amount of reserve cash financial regulators deem a bank like Lloyds should keep in order to survive a crisis of the like seen between 2008 and early 2009.

The bank said its core Tier 1 ratio rose by 2.5 percentage points to 12.8% after 2014 dividend payments were deducted.

Assets that require a regulatory risk weighting also moved in the desired direction during Lloyds’ full year with a 12% drop to £240bn.

Underlying profit for the year was £7.8bn, up from £6.2bn the year before and soundly beat market expectations of a profit of £7.5bn.

Lloyds, the cleaner bank, with growing independence

These wins are all further illustrations that Lloyds is further along the road to recovery than its bailed-out rival Royal Bank of Scotland, which on Thursday reported a hefty loss for the year.

And we judge the risk of further annual losses from RBS to be quite high.

RBS’s turnaround has been hampered by investigations into past misconduct and a sale of the government’s 79% stake remains some way off.

But the market continues to give a lukewarm reception to Lloyds’ full-year results and return to dividend paying status.

The bank’s shares traded with a gain as marginal as 0.3% on Friday morning compared to its closing price the night before.

It certainly appeared that little value was being given by traders to the notion that Lloyds’ dividend payment would encourage the UK government, which still holds 24% of the bank, to sell its remaining shares, making the shares more attractive and raising the prospect of a sale to private retail investors in a further public offering.

There’s a possibility that investors are still mindful of the continuing potential impact the regulatory dragnet may have on Lloyds, even though it’s far ahead of its UK rivals in reducing exposure to riskier activities.

Lloyds has set aside a further £700bn to compensate customers mis-sold loan insurance, taking its total bill for Britain’s most expensive consumer scandal to over £12bn, the most of any bank.

Dividends may continue to disappoint

The market is likely taking into account all of the above, and the fact that LBG’s new dividend era begins with a pay-out of less than the symbolic penny many investors expected.

Additionally, the group has pledged to reimburse shareholders with the equivalent of at least half of its sustainable earnings in the medium term.

Very approximately, if we assume market forecasts of net income for the 2015 year are in the right ball park at £4.38bn, and factor in some marginal equity dilution by that point, the minimum payment for the current year could be just 0.6p, in fact less than that for 2014.

From our reckoning, the market had been hoping that dividends for the current year would rise to about 2.8p.

With compounded growth of this stock since 2009 just 1 percentage point above the FTSE 100’s average, we might suspect that some shareholders are wondering, on the basis of the approximate pay-out outlook that enough is enough.

A little too bullish on interest margin?

There may also be grounds to query Lloyds Banking Group’s forecast that its net interest margin would expand by 10 basis points to 2.55% this year, some yards ahead of the current conservative market forecast that the NI margin will be flat to lower at 2.4% in 2015.

For one thing, Lloyds’ net interest margin view is out of kilter with its domestic-focused rivals, Royal Bank of Scotland and TSB, which have expressed a degree of caution on net margins this week amid some emerging pricing pressure for mortgages.

Taking all this into account, Lloyds as an investment may simply not match up on relative valuation against faster growing, higher-paying , albeit riskier choices, like Barclays and even Standard Chartered.

Plain (as in flat) sailing to continue

In drawing a weekly chart of Lloyds, we have to significantly expand the visual scaling, making the picture somewhat distorted, with price and even momentum peaks of years past cropped, even though in reality, their distance from current levels isn’t as marked as the picture suggests.

In other words, it’s been several years since this stock traded above 100p.

As shown, after Lloyds’ circa 300% gains from 2011 lows of 25p, its shares have not advanced much further, albeit a 23.6% retracement level has provided good support for the price for more than a year.

The stock is currently 8.5% from its high in the latter half of 2013, further backing the notion of its detractors that it has many characteristics of dead money.

For shorter-term traders though, since the last short-exit signal was generated on Monday from the Stochastic Reversal Cross trading system in City Index’s AT Pro platform, there have been no further short entries recommended in the half-hourly view of Lloyds Banking Daily Funded Trade.

In fact, visually, both momentum indicators are close to their lower extremes, although in the MACD’s case, the notion of the trade being oversold is only nominal.

There was a suggested short entry from the MACD Fast Line /Zero Cross System on Friday at 1000 AM, as the ‘faster’ moving average line, in red, slipped beneath the zero balance.

But it looks like it will take a much more compelling catalyst to dislodge this trade from the month’s range, shown in the grey band, and from the support line, in blue.

Pretty much the same looks set to apply to the underlying stock too, though absent any new positive catalysts, a drift back to recent support as low as 72p, would appear to be logical.