Here’s what dividend forecasts could do for the Lloyds share price in the next three years

What might help the Lloyds Banking Group (LSE: LLOY) share price gain some ground in the next few years?

I think it’s mostly sentiment. And it seems sentiment has been firmly against the banks in recent years. But I’m seeing signs that it could be changing.

For one thing, Lloyds shares, along with the other FTSE 100 high street banks, have been ticking up a bit.

Dividend forecasts

Before I think more about market sentiment, let’s take a look at how the Lloyds valuation is looking based on current broker forecasts.

The following table shows forecasts for this year and the next two, looking at how the price-to-earnings (P/E) ratio and dividend yield (DY) might go. And we’ll see how the dividends would be covered by forecast earnings

Year
2024
2025
2026

Forecast P/E
9.2
7.4
6.2

Forecast DY
5.3%
6.0%
6.6%

Cover
1.9x
2.2x
2.4x

(sources: Yahoo!, MarketScreener)

Now, I have to say, whenever I see a stock with a P/E of only around six and a dividend yield of 6.6%, I wonder what’s wrong.

But that’s what Lloyds looks like for 2026, after three years of forecast earnings and dividend rises. And when I see potential cover by earnings of 2.4 times, it makes be think the fault is with the market and not the stock.

Sentiment

But, sentiment is a fickle thing. I’ve been watching for ages for the FTSE 100 to break through the 8,000 point barrier.

Not that the particular number means anything specific. But financial headline writers to seem to love such things, and they can really drive optimism.

Though the Footsie is struggling to get to and stay above 8,000, I’m generally seeing more of that optimism right now. Some of it will be due to the start of a new financial year, and a whole new Stocks and Shares ISA allowance.

But falling inflation and interest rate hopes seem to be cheering people up too. Oh, and it’s sunny(ish).

Risk ahead

Saying that, we’re not out of the woods yet. In fact, disappointing US figures have just put a bit of a dent in the European interest rate outlook.

Lloyds is especially at risk if rates stay higher for longer. It’s the UK’s biggest mortgage lender. And if the Bank of England should feel the need to keep the squeeze going, the market might not see the share as such good value as I do.

What cheer there is seems to be firmly behind recovery and growth stocks now, like Rolls-Royce Holdings. A four-bagger in two years? We Lloyds shareholders can only dream.

Dividends

Still, I do think sentiment can eventually get back behind the banks and send Lloyds shares climbing again. And I reckon it’s those dividend forecasts that could make the difference.

We might need to see another set of, at least, interim results to get a feel for how the 2024 cash situation is going.

But a 6.6% dividend yield by 2026, more than twice covered by earnings? That’s a lot more attractive to me than the 1.6% marked in for Rolls-Royce for the same year.

The post Here’s what dividend forecasts could do for the Lloyds share price in the next three years appeared first on The Motley Fool UK.

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Alan Oscroft has positions in Lloyds Banking Group Plc. The Motley Fool UK has recommended Lloyds Banking Group Plc and Rolls-Royce Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.