Might the Lloyds dividend survive a housing market crash?

One of many points of interest for me of proudly owning shares in Lloyds (LSE: LLOY) is the earnings potential. As a big financial institution, it has proven it may be massively worthwhile.

Final 12 months, for instance, post-tax income got here in at over £100m per week. As a buyer affected by excessive transaction fees and department closures, I can not say I just like the financial institution’s technique.

However, clearly, it may be extremely worthwhile. The annual Lloyds dividend was lately elevated by round 20%. The shares at the moment yield 4.7%.

However how safe is that dividend, for instance if the housing market actually begins to wrestle? In any case, Lloyds is the nation’s largest mortgage lender.

Default dangers

Historical past will help us right here – however not utterly. In the course of the monetary disaster, Lloyds lower its dividend and It took years for it to be restored. Even at the moment, it’s far beneath the extent it was again then. That’s another reminder, as if any have been wanted, of how a financial institution will be negatively affected by a tricky economic system.

Individuals begin to default on their loans on the similar time property values drop. So a financial institution will be left unpaid whereas holding property price lower than they have been. That occurred to Lloyds – and most of its opponents – throughout the monetary disaster.

However whereas the underlying sample is unlikely to alter, it’s price noting that the Lloyds of at the moment is just not the identical financial institution because it was in 2008. The financial institution has tightened its danger controls since then. So each time the following housing market crash comes, Lloyds needs to be higher ready than was final time round.

Gathering storm

Lloyds has been at pains to level out its asset high quality and low stage of defaults over the previous few quarters.

its annual outcomes printed final month nevertheless, there may be an underlying impairment cost of £1.5bn. The 12 months earlier than, that quantity had been a credit score, though that partly displays the unpredictable financial atmosphere of the pandemic period.

What is evident nevertheless, is {that a} £1.5bn impairment cost is sizeable. Certainly, it’s a part of the rationale the financial institution’s statutory post-tax revenue fell 6% in comparison with the prior 12 months. It stays enormous. But when this 12 months’s impairment cost grows once more, it might additional weaken income.

Lloyds dividend protection

In some ways in which may not matter an excessive amount of for the Lloyds dividend. Of the £5.6bn post-tax revenue, solely round £1.6bn can be used to pay dividends. So even after the massive improve within the payout, it’s comfortably coated by earnings.

In actual fact, one purpose I offered my Lloyds shares final 12 months was as a result of I felt administration was not distributing as massive a share of income as I would really like within the type of dividends. The Lloyds dividend remains to be beneath its 2019 stage.

That warning does give the agency a sizeable cushion although. Even when income fall sharply, they may nonetheless be massive sufficient to assist the dividend at its present stage.

Nevertheless, if a crash drives mortgage defaults up sufficient, the dividend may not be sustainable. In a crash, banks is also mandated by their regulator to droop dividends. Lloyds has already carried out so twice this century. No dividend is ever assured — together with at Lloyds.