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Don’t expect a return to normal for bank dividends just yet

Dividends are back on the menu for banks. Such news would normally trigger screams of joy in households across the country, given how many people own banking shares as a source of income.
However, once you read the fine print it seems that Appletiser is a more appropriate way to toast the news than waste a good bottle of champagne.
While banks are allowed to pay a dividend at the end of their 2020 financial year, they’ve been told by the Prudential Regulation Authority (PRA) that dividends for 2021 can only be accrued and not paid, at least not until it’s had time to reassess the situation next summer.
Put simply, investors denied a dividend for so long in 2020 will get something early next year, but then it could be another wait before the subsequent payment.
It’s no wonder that shares in Lloyds (LLOY) dived 5% on the news, although sterling weakness will have also weighed on the stock that day.
Investors want a regular stream of income and there was growing expectation for dividends to recommence very soon. People reliant on cash from their investments don’t want a stop-start trickle of cash when they are trying to pay the bills.
Lloyds’ situation is particularly frustrating to investors because the bank last year declared that its 2.4 million shareholders would welcome more frequent dividends, so it said they would be paid quarterly instead of half-yearly from June 2020.
That plan was derailed by the banking sector being told it couldn’t pay dividends during the pandemic. The regulator wanted lenders to have extra capital in case of economic setbacks, bad debt shocks and to support consumers and businesses.
It now looks like the 2020 ‘restart’ payments could potentially be more generous than the market expected as some analysts hadn’t forecast anything at all for the fourth quarter period.
On 11 December following the news, we noticed the Refinitiv ‘SmartEstimate’ forecast for Lloyds’ 2020 dividend jumped from 0.31p to 0.37p – impressive until you realise that still only amounts to a measly 1% yield.
Refinitiv says its SmartEstimate is more accurate than the consensus as it places more weight on recent forecasts by top-rated analysts.
Lloyds is forecast to pay 1.65p in dividends for its 2021 financial year, adding up to a 4.6% yield on the 36.12p price at the time of writing.
While Refinitiv’s forecast for Lloyds’ 2021 dividend didn’t change after the PRA announcement, there is now a lot of uncertainty about estimates in the market, particularly if the regulator decides next summer that economic conditions haven’t improved enough to warrant banks handing out more cash for a while.
The PRA will decide on payments ahead of the banking sector’s half-year results which tend to happen in late July and early August.
Ultimately the regulator is being extra cautious as it wants banks to have lots of capital to cope with any shocks as well as being able deploy more capital if the economy needs further support.
Such regulatory interference will be unwelcome for people reliant on income from their investments. We must hope this will only be a short-term issue.
Important information:
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Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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