Is the Lloyds dividend forecast tempting?

With leading bank Lloyds (LSE: LLOY) set to announce its full-year results to the City tomorrow, I have been considering whether now might be a good time to buy the shares for my portfolio again. I sold up last year, concerned about the wider economic environment and the fact that the bank’s dividend still had not returned to pre-pandemic levels.

Could the Lloyds dividend forecast be enough to tempt me back into the stock?

Lloyds dividend forecast

Last year saw the final dividend grow by 230%. However, I do not expect anything like the same order of increase this time around.

At the interim stage this year, the year-on-year increase was 19%. While it is a lot less than a 230% jump, that is still substantial. My Lloyds dividend forecast for tomorrow is a full-year increase of around that 19% level, or perhaps slightly more. That would take the final dividend to 1.6p per share.

Before the pandemic, the final dividend represented approximately two-thirds of the year’s total. With an interim dividend last year of 0.8p, a final payout of 1.6p would restore this historical apportionment between interim and final payouts.

If the dividend for the full year does come in at 2.4p, it would mean that Lloyds shares at today’s price offer a prospective yield of around 4.7%.

Slow dividend recovery

A full-year Lloyds dividend forecast of 2.4p per share, however, would still leave the payout below where it was before the pandemic.

The interim dividend was only 71% of its 2019 equivalent. Yet between 2019 and last year, earnings per share for the six-month period concerned grew 37%. Based on that, I would have expected the interim dividend now to be markedly larger than it was in 2019, whereas in fact it is significantly smaller.

Additional capital return

It is not as if Lloyds does not have ample spare cash. Indeed the black horse has been using up to £2bn of spare cash to buy back its own shares. I would not be surprised to see further buybacks tomorrow. The business is the leading mortgage lender in the UK and has a strong brand. Both things could help it keep making big profits.

My inference is that the bank’s management simply does not prioritise returning the dividend to its pre-pandemic level. It has had ample cash with which it could do so, but so far has chosen not to.

There is also the possibility of a special dividend. Lloyds could distribute some its surplus capital with a one-off dividend. But with management’s attitude to dividends so far and the risk of increasing loan defaults hurting profits, I do not expect such a move.

My move

Over the past year, the Lloyds share price has ultimately moved sideways: it is almost exactly where it started. Given the share buyback has led to fewer shares in circulation, that means that the bank’s overall valuation has actually fallen in that period.

While the dividend yield is attractive, I think the flat share price indicates ongoing investor concern about what a weak economy could mean for profits at the bank. I have such concerns myself. Given that, the Lloyds dividend forecast is not enough to sway me. So I will not be buying.