Barclays’ appointment of a CEO with a “proven track-record” of business restructuring; HSBC announcing an extensive restructuring programme; the government declaring a sell-down of its RBS shares; Lloyds announced its return to the dividend register following an eight-year absence.
The aforementioned all seem to indicate that after a long period out in the cold following the financial crisis, the big banks may finally be ready to increase their dividends and tiptoe back into the hearts of income investors.
“Income funds are pretty light in the banking sector,” said Stephen Message, manager of the Old Mutual UK Equity Income Fund. “Historically it has not been a strong dividend payer. But that is all set to change, and I would not be surprised to see more income funds coming in over the next year.”
Brewin Dolphin banking analyst James Box believes that with slim prospects of growth, banks have little choice as to what they will do with future profits.
He said: “There is not much growth out there, and, once they have built up enough capital, I do not see what else the banks can do with their earnings other than distribute it to shareholders.”
In line with this view, Alex Wright, manager of Fidelity Special Situations, has three banks his top 10 stocks, with HSBC, Lloyds and Citigroup representing 6.1%, 4.6% and 4.2% respectively.
“We are expecting pay-out ratios of more than 60% of earnings by 2016, which will give the 6% dividend yield that we are likely to see,” he expanded.
“Income investors have not been in this space because they are worried about regulatory changes and weak balance sheets,” Wright added.
“However, these are yesterday’s problems – the banks have worked through a lot of the challenges, and going forward the sector is going to pay out steady high income, which will eventually lead to a re-rating.”
Picking your bets
Message is particularly positive on sector’s dividend outlook as exhibited in his portfolio, where he has held 3.5% and 3.3% weightings in Barclays and Lloyds respectively since spring 2014, adding 4.5% in HSBC a few months later.
“After six-and-a-half years without paying a dividend Lloyds turned to the dividend register, which is symbolic of a lot of the issues that have been around the past now being behind them,” he said. “Three or four years ago, the prospect of Lloyds paying a dividend would have seemed absurd, so it is a line drawn in the sand.
