Lloyds TSB

Lloyds TSB (LSE: LLOY) 2004-07-01

The banking sector is amongst the largest in the FTSE100 index and consequently amongst the largest in the whole market because this index contains around 80% by capitalisation of all listed shares.

Lloyds is by far the highest yielding bank in the FTSE. Apart from its premier yield status in the banking sector, Lloyds is also presently the highest yielding FTSE100 share too, thus making it a doubly desirable share.
Lloyds has some downsides. The main one is that it has not been increasing dividends. They have been static at 34.2p for the last three years to 2004 and the forecasts are for this to continue in 2005 and 2006.
Many observers feared that the company would cut the dividend when its earnings per share fell, but this did not eventuate. Eps has since recovered to a limited extent from the 2002 low point making a dividend cut look pretty unlikely in the near future.
In further support, the immediate outlook given by recent director’s comments, expects a “satisfactory trading performance” for the year to 30/12/04.

The fact that Lloyds TSB hasn't increased their dividends recently is not a good sign, but the yield, as it stands, is simply too high to ignore from such a blue chip company. The margin over other major banks is so large that it would take about four years for the next highest yielder, Barclays, currently on 5.1% and assuming an increase of 10% per year, to catch up with Lloyds’7.5% if the latter dividend remains static.
To equal the total cash dividends received would take a total of about nine years!. During the interim, there has to be a decent chance that Lloyds will itself resume increasing its dividends at some point.

Over recent years the shares have underperformed compared with the other major business banks. But this is precisely what makes them attractive. As is often the case, the market seems to have overdone the bad news and accorded Lloyds a rating, for some years now, that is far too low in our opinion.

Buy Lloyds TSB (LLOY:LSE) at today’s price, for a good dividend yield Plus the prospects of capital appreciation of +10%.