Lloyds tipped to top 100p and pay special dividends

The government is selling down its stake in Lloyds Banking Group, and making a profit on it, too. But the lender has acquired quite a fan club in recent months and more of those in the know think the shares will hit three figures before long.

Among them is Chintan Joshi at Nomura. "As Lloyds' payout yield improves from 3.5% in 2015E to 6.5% in 2016E (vs 5.1% consensus), we expect the stock to re-rate," said the analyst on Wednesday.

"By the end of 2015, we expect a CET1 of 14% after a 3p 2015 dividend and GBP 2bn of payment protection insurance (PPI) costs. This is comfortably above the 12% minimum requirements that the company perceives and similar to the 14% CET1 requirement we perceive."

Still bullish on the sector, Joshi keeps his 'buy' rating on Lloyds shares and 100p price target, and expects earnings per share to hit 8.32p in 2015.

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Joshi doesn't expect buy-backs or special dividends in 2015, but does think it's likely next year. Looking beyond the fourth quarter, while there is value in buybacks, the higher yielding banks tend to have higher valuations in the current low interest rate environment.

"If rates remain lower for longer, this is unlikely to change. Thus, management will likely maintain flexibility on buy-backs versus special dividend debate depending on how the share price evolves," writes Joshi. "We expect fairly limited engagement from Lloyds on 2016 payouts at this stage but if it does engage robustly on this topic, it will signal confidence on payouts for 2015 and beyond. We expect an interim dividend of 1p and a final dividend of 2p for 2015."

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