Could this dividend news boost Lloyds’ share price? – The Motley Fool UK

Lloyds Bank (LSE: LLOY) shares have had a good run recently. This year, Lloyds’ share price is up about 30%. Over 12 months, the FTSE 100 bank stock is up nearly 60%.

Can Lloyds shares keep rising? I think it’s certainly possible. Today, there has been some big news on the dividend front. And I’m not convinced this news is fully priced into the stock at present.

Lloyds shares: dividend ban lifted

The news I’m referring to is in relation to the Bank of England’s (BoE) ban on UK bank dividends.

Early last year, the BoE banned UK banks such as Lloyds from paying out dividends to shareholders. The aim was to ensure UK banks had enough capital on hand to support the economy during the coronavirus pandemic (the worst economic conditions in 300 years).

In December, the BoE eased the ban slightly, which allowed Lloyds to pay a very small dividend (0.57p per share) for 2020.

However, this morning, the regulator completely removed the dividend ban, saying its stress test had shown the banking sector is well-placed to cope with the impact of Covid-19 on the economy.

Big dividends on the way?

This development is great news for Lloyds’ shareholders. This year, City analysts expect the UK bank to pay out dividends of 2.08p per share. At Lloyds current share price of 47.6p, that payout equates to a prospective yield of 4.4%. That’s very attractive in the current low-interest-rate environment.

Share price boost

Indeed, it’s so attractive that I think it could increase demand for Lloyds shares from both private investors (ie retirees seeking income) and institutions such as pension funds.

This could potentially push Lloyds’ share price up further. It’s worth noting that immediately after the BoE dividend news, analysts at Jefferies raised their price target for Lloyds shares from 55p to 57p. That’s about 20% above the current share price.

When you consider that Lloyds shares currently have a forward-looking price-to-earnings (P/E) of less than eight and offer a prospective yield of around 4.4%, they certainly look attractive from a value-investing point of view.

Risks to consider

Of course, there are plenty of risks to consider with Lloyds shares. One is that the actual dividend for 2021 could be very different from the dividend forecast. The figure of 2.08p per share I mentioned above is simply the average analyst estimate.

At times, these consensus forecast figures can be way off the mark. At this stage, we really don’t know what kind of dividend Lloyds will pay for 2021. Earlier this year, the bank said it would update the market on interim dividend payments with its half-year results.

Another risk to consider is there could be further Covid-19 setbacks for the UK economy. This could impact Lloyds’ profitability and share price. It’s worth noting that the UK economy grew more slowly than expected in May.

Overall however, I think the outlook for Lloyds’ share price is attractive. I wouldn’t be surprised if its shares rise further in the second half of the year, and beyond.

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Edward Sheldon owns shares of Lloyds Banking Group. 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.

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