António Horta-Osório, chief executive of Lloyds Banking Group, has said he aims to start paying out up to 70 percent of the bank's earnings in dividends within three years as he seeks to attract investors ahead of the sale of the government's stake.
Horta-Osório disclosed the dividend target, which is significantly higher than the proportion of earnings paid out by the bank's UK peers, during a recent round of investor roadshows in the UK and overseas, according to people involved in the meetings.
Lloyds has not paid a dividend to investors since 2008, when it was bailed out by the government and ordered to freeze payouts. However, the bank took the first step towards reinstating the payout last week when it said it would discuss the timing and conditions of such a move with the regulator over the next five months. The regulator could block the resumption of payments if it decides the bank is not strong enough.
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If Lloyds is given clearance by the regulator to resume dividends they are likely to start at a low level, possibly 1p per share next year. But Mr Horta-Osório expects to be able to increase the payout quickly to 60-70 percent of earnings by about 2015 as he drives up the bank's return on equity from the current 9 percent to his target of 12.5-14.5 percent.
Revived hopes of a payout coupled with a swing back into pre-tax profit in the first half of the year helped push Lloyds' shares above the government's 73.6p break even price last week for the first time in almost three years, fueling expectations that George Osborne, the UK's chancellor, would start the privatization process soon. Some bankers thought an initial sale of about £5bn of Lloyds' shares, equivalent to about a quarter of the government's 39 per cent stake, could take place as early as Monday. If the Treasury decides not to sell a tranche this week, the process is expected to be delayed until September.
Horta-Osório would receive a share bonus currently worth more than £2 million if the government sells at least a third of its stake above 61p, the price adjusted for fees at which the shares are booked in state accounts. The award, which would be deferred until 2018, would also be triggered if Lloyds' shares traded above 73.6p for 30 days irrespective of whether the government makes a sale.
Lloyds declined to comment yesterday but, announcing results last week, the chief executive said he intended Lloyds to be a "high dividend paying bank in future".
A payout ratio of 70 percent would put Lloyds above its UK banking rivals and in the top third of FTSE 100 companies. HSBC distributed 61 per cent of earnings to shareholders last year, according to Bloomberg data, the highest of the UK banks. A number of US and European banks paid out a higher proportion last year, including Santander, the Spanish bank where Horta-Osório previously worked, which shared 275 per cent of its earnings among investors.
Last week, Barclays' chief executive Antony Jenkins promised to increase the dividend ratio at the bank to 40-50 per cent next year – higher than a 30 per cent target he set out five months ago – as he launched a £5.8 billion equity raising to meet new capital requirements.