The outlook for the UK economy has crumbled in 2022. Yet surprisingly the Lloyds Banking Group (LSE: LLOY) share price has remained quite robust.
Sure, Lloyds shares have dropped 5% since 1 January. This is also more than the 0.5% decline the broader FTSE 100 has experienced in that time. But in my book Lloyds’ drop fails to reflect the growing huge threat to economically sensitive banks posed by soaring inflation.
Big dividend yields
At any rate Lloyds’ weaker share price has given a boost to its dividend yields for the next couple of years.
In 2022, the banking stock is predicted to pay a total dividend of 2.36p per share. And next year it’s expected to lift the shareholder payout to 2.58p.
Consequently, Lloyds’ dividend yields for 2022 and 2023 stand at a healthy 5.2% and 5.7% respectively.
City forecasts suggest that the share has a good chance of hitting current dividend forecasts, too. Projected payments for the next couple of years are covered between 2.5 and 2.7 times by anticipated earnings.
Put simply, Lloyds’ share price has remained solid on hopes that the Bank of England will keep hiking interest rates.
Higher rates increase the difference between the rate which banks offer to savers and the rate they charge borrowers. And recent central bank action has raised hopes that Lloyds and its peers will enjoy the sort of margins they’ve been missing since policy makers aggressively cut rates following the 2008 financial crisis.
The Bank of England has raised its benchmark rate by 0.25% in each of the last five months. These helped to drive net income at Lloyds 12% higher (to £8.5bn) in the first half of 2022.
It’s likely that it will have to keep tightening policy too as inflation continues to stride away from its 2% target. Some commentators and economics are even tipping a 0.5% hike when the Monetary Policy Committee meets on 4 August.
Recent moves by the Bank of England have had a clear benefit for Lloyds. But in my opinion the dangers facing the FTSE 100 bank more than offset any future benefits it could enjoy from further rate rises.
You see the outlook for Britain’s economy is darkening rapidly. This was illustrated by the IMF’s decision to reduce its GDP forecasts for the next two years. The body now expects domestic growth of 3.2% and 0.5% in 2021 and 2022 respectively, down 0.5% and 0.7%.
In this landscape Lloyds faces a possible explosion in bad loans and a slump in revenues. Indeed the business booked a £377m loan impairment charge for the first half as the cost-of-living crisis worsened.
This incidentally caused pre-tax profit to fall 6% year on year, to £3.7bn.
So should I buy Lloyds shares for its dividends, then?
I believe the bank is in good shape to meet 2022’s forecast looking at earnings coverage and its balance sheet. But as the economic landscape deteriorates, I think its appetite to keep paying large dividends could come under serious strain.
Besides, I think there’s a high chance Lloyds’ share price could sink as economic conditions worsen. And this could wipe out the benefit of owning the company’s shares for its dividends. All things considered I’d rather buy other dividend stocks today.