According to my research, at the time of writing there are 23 companies in the FTSE 100 that support dividend yields of 6% or more. Of these companies, only eight have a dividend cover ratio, where earnings per share covered the expected dividend per share of at least 1.5.
Two of these businesses are homebuilders, which some investors might not feel comfortable with, and one is the struggling holiday group Tui. There’s also airline group IAG, another business some investors might not be comfortable owning.
This leaves just four companies in the FTSE 100 with dividend yields of more than 6% and dividend cover ratios of 1.5. Two of the remaining companies are insurers, one is Royal Bank of Scotland, and the last one is Lloyds Banking Group (LSE: LLOY).
Today, I’m going to explain why I believe Lloyds has the highest and safest dividend yield in the whole FTSE 100.
Too much capital
Lloyds has a problem most businesses can only dream of. The bank has too much money. Ever since the group’s state bailout during the financial crisis, management has been working flat out to reduce costs and put the company back on a stable footing. After a decade of hard work, it’s done just that.
At the beginning of May, the bank reported a pre-tax profit of £1.6bn for the first quarter of 2019, and its capital position is one of the best in the European banking sector. The group reported a pro forma CET1 ratio of 13.9% for the year ending December 2018.
To celebrate its improving results, Lloyds declared a £1.75bn share buyback, bigger than many analysts had forecast, and raised the prospect of further substantial capital returns later in 2019.
Lloyds is better positioned to return capital to investors than virtually all of its UK banking peer group. According to the Financial Times, during the first quarter of 2019, the bank was the only business to report a return on tangible equity above its cost of equity. Return on tangible equity was 12.5% for Q1.
City analysts don’t expect Lloyds’ profits to come under pressure anytime soon either. They reckon the group will report a net profit of at least £5.6bn per annum for the next two years.
Further cash returns
The fact that Lloyds is already well capitalised seems to indicate management will look to return a significant portion of profits over the next two years, and that tells me shareholders could be in line for big cash rewards.
The numbers also tell me the bank’s current dividend is exceptionally safe for the time being. Indeed, payout cover is expected to increase to 2.2 times next year, based on current City earnings expectations for the group, which implies profits would have to drop by 50% before management would have to reconsider reducing the dividend.
So, after considering all of the above, I believe not only is the Lloyds dividend safe, but it’s also the most attractive in the FTSE 100 today.
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Rupert Hargreaves owns no share 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.
Motley Fool UK 2019