This Bank Is Bringing Back Its Dividend

By Markets Fool.com

It's like the return of a long-lost British friend. After suspending its dividend for over six years, storied U.K.-based financial major Lloyds Banking Group has proposed its reinstatement.

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This coincides with the release of fourth quarter and fiscal 2014 results, with the latter boasting the company's first annual net profit since last decade's financial crisis. Dividends are usually a sign of financial health; let's quickly check the pulse of this bank.

Slight return
First, though, a caution: Income investors should think twice before pouncing on Lloyds.

The proposed dividend -- which requires Bank of England approval -- is 0.0075 pence (barely over $0.01) per underlying U.K.-listed share. This equates to 0.03 pence (a bit shy of $0.05) per one of the bank's American Depositary Shares, as each ADS is the equivalent of four shares of the British company. Either way, this comes out to a not-so princely yield of -- get ready for it -- 1%.

That's barely half of the average yield of dividend-paying stocks on the S&P 500 index, which isn't saying much -- that rate is currently 1.9%.

But considering the bank's recent history, we could say it's admirable that it's planning on paying a dividend at all.

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Crisis management
Lloyds' (and its predecessor companies) existence stretches back to the 18th century, and for most of its life, it generally enjoyed a reputation as a sober and prudent financial institution. It was also a steady dividend payer, handing out a distribution that once yielded around 7%.

And then last decade's financial crisis hit. Incumbent British banks were slammed just as hard as, or harder than, their American counterparts. Lloyds was one of the most battered after it recklessly bought an ugly mess of a lender, HBOS, in 2008.

These and numerous other damaging decisions from the nation's major banks prompted the government to pump 37 billion pounds (roughly $62 billion back then) into the sector. More than half of this amount -- 20 billion pounds ($34 billion) -- was funneled to Lloyds.

In return, the government became the company's largest shareholder, at one point owning as much as 43% of the lender (after a series of divestments, it now owns just under 24%).

It's been a long road back from there. From 2010 to 2013, the bank reliably posted deep net losses ranging from 320 million pounds to 2.8 billion pounds ($488 million to $4.3 billion). Fiscal 2014 saw it finally emerge into positive territory to the tune of nearly 1.5 billion pounds ($2.3 billion).

This was due largely to a reduction in impairments, not some vast improvement in the fundamentals that really count -- for example, both total income and total loans were down slightly on a year-over-year basis. Still, bottom line is bottom line, and considering its tribulations, Lloyds is to be commended for posting a positive one.

Sign of life
Neither a tiny dividend nor a billion pound-plus net profit is going to bring hordes of investors back to Lloyds shares.

The stock has barely moved since the announcement of the latest results and the dividend proposal. In fact, after a few (mostly downward) swings, the share price is roughly at the same level it traded for in August 2010. There's simply too much bad recent history and lingering mistrust.

Rather, it seems to me the dividend serves as a token payout, a money-where-your-mouth-is message to investors (and the U.K. taxpayer, with his/her sub-24% stake) that the bank is getting better.

Lloyds has a good chance to ramp up its improvement on the back of a recovering U.K. economy;home lending in particular represents a good opportunity, since the company wrote around 20% of the mortgages outstanding in the country last year. It would be encouraging to see a rising net profit fueled by fundamentals like loan growth.

The company is still a turnaround story, and given the lightness of its welcome-back dividend, it's probably not worthwhile to buy shares of it on that basis. But if Lloyds can keep that positive momentum going, it'll have a good shot not only at raising that dividend, but becoming as healthy as it was in the good old days.

The article This Bank Is Bringing Back Its Dividend originally appeared on Fool.com.

Eric Volkman has no position in any stocks mentioned. Nor does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.