Why passive income matters to Lloyds Bank shareholders

Passive income is important to many shareholders, but especially those of Lloyds Banking Group (LSE:LLOY). It really helps ease the disappointment of an underwhelming share price performance.

The stock is down 26% since February 2019. Over a shorter time frame, its shares are now changing hands for 10% less than at the start of 2024.

Dealing with disappointment

As one of the 2.3m people with a stake in the bank, I find this particularly frustrating. That’s especially so when I look at two common valuation metrics that suggest it’s undervalued.

The price-to-book ratio compares a company’s stock market valuation with its book (accounting) value.

If Lloyds were to cease trading today, and sold all its assets for the amount stated in its accounts at 30 September 2023 (£893bn), then used the proceeds to repay its liabilities (£848bn), there would be enough cash left over to return 67.6p per share to shareholders.

That’s a premium of around 57% to its current share price.

An alternative way to value a business, is to consider its profitability relative to its market cap.

Analysts are expecting a profit after tax of £5.3bn, for 2023. If correct, it means the shares currently have a price-to-earnings ratio of 5. This is low compared to the current figure for FTSE 100 of around 11.

A possible explanation

But with nearly all of its revenue generated in the UK, Lloyds’ performance is closely linked to the domestic economy.

Although rising interest rates will boost its income, there’s an increased risk of borrowers defaulting on their loans.

Also, the UK economy is struggling to grow at the moment.

I’m therefore not expecting its share price to escape the doldrums any time soon.

Payday

But I’m looking forward to May, when the bank pays its next dividend.

It will be its final payout for its 2023 financial year after it made an interim payment of 0.92p a share in September 2023.

Analysts are forecasting a dividend for the year of 2.7p, which means I could receive 1.78p in three months’ time.

However, I’m more optimistic. Based on the 15% increase in the interim dividend, I think the total amount paid for FY23 could be 2.76p — a yield of 6.4%.

Following the sale of Telegraph Media Group, there’s also the possibility of an additional payment in 2024.

One of the conditions of that transaction was that a loan of £1.2bn would be repaid to Lloyds.

The deal is still subject to government approval, but if it’s allowed to proceed, there’s been speculation that the bank could return an additional £500m-£700m (0.78p-1.1p per share) to shareholders.

Looking further ahead, the average of analysts’ forecasts is for dividends of 3.03p (FY24), 3.35p (FY25), and 3.71p (FY26).

Of course, returns to shareholders are never guaranteed.

But as far as I’m concerned, the possibility of receiving these sums helps to soften the blow of a lacklustre share price.

Without such a generous yield, I’d be struggling to find a reason to hold on to my Lloyds shares.

Although I believe the bank to be undervalued, its poor share price performance suggests other investors don’t agree with me.

Until this changes, I’m likely to remain a frustrated shareholder, albeit one receiving some large dividend cheques.