Powers of recovery – Lloyds’ resumed dividend may be small but it is still a significant step
After an absence from the UK’s dividend register dating back to the dark days of the financial crisis in 2008, Lloyds Banking Group has recently announced it is to resume paying a dividend. The news marks the end – or perhaps at least the beginning of the end – of a very long and painful period for the bank’s longer-term shareholders, which includes us here on The Value Perspective.
Prior to the crisis, the then Lloyds TSB had consistently been one of the UK’s largest and most reliable dividend-payers and, while the 0.75p it will pay per share is some way from the 35.9p total dividend it distributed in 2007 and even the 11.4p interim pay-out it made in August the following year – just weeks before its £20bn bail-out by the UK government – it is a significant step in the right direction.
It is nevertheless worth acknowledging that, even without earning a penny in income, investors could have doubled their money from Lloyds if – and admittedly it is a sizable ‘if’ – they had been prepared to take the difficult decision of buying in when the wider market had concluded things were looking so bleak for the bank, as recently as late-2011.
Tellingly, nearly all of that capital return had been made before the start of 2014 – since when Lloyds has been a pretty dull performer. The eventual dividend resumption may have been a catalyst for this but it had clearly been priced in a long time in advance. In other words, as is so often the case in investment, anyone waiting for official confirmation of the dividend has missed out on a big chunk of the upside potential.
Admittedly Lloyds’ rehabilitation has taken a very long time yet we would argue the more important point is that it has actually been achieved to the extent that the bank is once again financially strong enough to return to the dividend register. The process of corporate recovery that many investors seemed to doubt would ever happen has taken place – as it so often does – and indeed we have seen numerous examples of this elsewhere across the market in recent years.
Examples of businesses that got into trouble around the financial crisis but are now resuming or growing their dividend payments include Trinity Mirror, another long-term holding of The Value Perspective. We also highlighted a number of other examples in Cut and thrust, making the wider observation that, while dividend cuts reflect past mistakes, they also sow the seeds of future dividend growth potential.
For large portions of the seven years since Lloyds received its bail-out, many people clearly could not envisage it ever again paying a dividend but times – and companies – do change. The process of corporate recovery and businesses’ ability to adapt and respond to changing environments are things the wider market consistently underestimates and, as a value investor, this can yield attractive profits over time.
Fund Manager, Equity Value
I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.
The views and opinions displayed are those of Nick Kirrage, Andrew Lyddon, Kevin Murphy, Andrew Williams, Andrew Evans, Simon Adler, Juan Torres Rodriguez, Liam Nunn, Vera German and Roberta Barr, members of the Schroder Global Value Equity Team (the Value Perspective Team), and other independent commentators where stated.
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