RBS' and Lloyds' dividends to point the way for UK taxpayers

Back-to-back second-quarter figures from the two British banks will give an indication of the speed with which the government can sell its stakes.

RBS
Source: Bloomberg

The Royal Bank of Scotland and Lloyds certainly share a few things in common, not least being bailed out by the UK taxpayer in the darker days of the financial crisis. But they’re now some way apart in their respective battles to put all that behind them.

On Thursday 30 July the RBS will post its second-quarter figures, and on a year-on-year basis it won’t make for good reading. The adjusted earnings per share are expected to have fallen from £0.08 to £0.068, sales could be down from £4.925 billion to £4.108 billion and the pre-tax profit is looking to have collapsed from £1.01 billion to £35.5 million.

Institutional analysts are not full of optimism with four buys, 15 holds and nine sell recommendations. The full-year price target still offers a little upside. But, with the current price around 350p the twelve-month target of 361p doesn’t leave too much to get excited about.

RBS is still battling historical issues as it continues to try and reduce its cumbersome size by asset stripping. However, still hanging over the business are ongoing financial penalties and costly legal battles. The fourth-quarter of 2014 saw costs of $1.475 billion and another $1.15 billion in the first-quarter of 2015.

Now the Conservative Party faces slightly fewer policy restrictions, it has made it clear it aims to reduce UK taxpayer exposure to the banks as quickly as possible. To make acquiring RBS shares more appealing to the investment community, the reintroduction of dividend payments is a must. The last time RBS paid out a dividend was 23 May 2008.

RBS chart

In contrast Lloyds has seen its shares climb above the net break-even level for the government’s bailout and Morgan Stanley has overseen the reduction of UK taxpayer exposure from 43.4% to below 15%.

On Friday 31 July Lloyds is due to post its second-quarter figures with mixed results on a year-on-year basis. The adjusted earnings per share are due to fall from £0.029 to £0.02 while sales are set to drop from £4.723 down to £4.57. However the bank is set to announce a pre-tax profit of £1.458 billion, up from last year’s loss of £506 million.

Institutional opinion is broadly positive with 15 buys, 11 holds and only four sell recommendations. Even with the share price sitting above the government’s break-even level, the twelve-month target of 93p still offers a healthy upside from the current market price of 85p. Why? Because Lloyds started paying a dividend again on 7 April 2015 and is expected to announce a further 1p dividend ahead of its ex-date on 6 August 2015.

The one uncertainty that currently hangs over Lloyds stems from the fact that government had wanted to offer retail investors the chance of buying into the company. But as shares have sold so well in the open market, there’s a real danger there may not be enough shares left for any public offering. Lloyds’ ability to join the ranks of FTSE 100 equities offering a healthy income along with impressive capital returns has turned it back into an attractive home for investment funds. It’ll be interesting to see whether the government’s eagerness to shed ownership of Lloyds wins out over meeting its pre-election promises. 

Lloyds chart

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