Neil Woodford buys Lloyds Bank for his Income Focus Fund

Lloyds Bank dividend

In May, Neil Woodford released the full list of holdings for his new Income Focus Fund. Among the top holdings were many of the usual Woodford favourites, such as AstraZeneca, Legal & General, Imperial Brands and Provident Financial. But there was one name that probably surprised a few people – Lloyds Banking Group (LON:LLOY) (LLOY.L).

So does that mean it’s time to buy Lloyds? Is the bank a good investment from a dividend perspective?

Profitability rising

There’s no doubt Lloyds has struggled in recent years. Profits have been weighed down by the cost of bad lending at HBOS, and the bank has had to pay huge fines in relation to the misselling of PPI. After paying out 35.9p in dividends for FY2007, the bank cut its dividend entirely and didn’t reinstate it until FY2014, paying out a small dividend of 0.75p per share.

However, Lloyds does appear to be turning things around, with FY2016 profit before tax rising 158% on the year before, and CFO George Culmer stating that underlying profitability is likely to become “more stable and predictive going forward.”

Woodford said: “Specifically, we view Lloyds as a well-managed bank with a conservative approach to its balance sheet. Its valuation looks very attractive in our view, and it has the ability to pay a very healthy and growing level of dividend.”

Appealing dividend yield

The dividend yield does look appealing. Since reinstating the dividend in FY2014, Lloyds has lifted its payout over the last two years, paying out 2.25p and 2.55p for FY2015-FY2016. City analysts expect the payout this year to total 3.98p, equating to a yield of a high 5.8% at the current share price. On forecast earnings of 7.44p, dividend cover is expected to be around 1.9 times.

Risks

However, the investment case isn’t without risks. Investors should note that Lloyds is highly exposed to the UK economy with 100% of revenues generated domestically. So if the UK was to struggle as a result of leaving the European Union, or the property market took a downturn, profitability at Lloyds could suffer.

Low valuation

Having said that, the stock doesn’t look expensive. With earnings of 7.44p forecast, the stock trades on a low forward looking P/E ratio of just 9.3. So I can definitely see some appeal in holding Lloyds at present. However personally, I think I’ll keep Lloyds on my watch list for now, as I’d like to see just a little more evidence that the bank can deliver on profits and dividends.

Disclosure: Edward Sheldon, CFA owns shares in Legal & General Group and Imperial Brands. 

This article is provided for general information only and is not intended to be investment advice. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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