3 reasons I’m avoiding Lloyds shares despite their huge dividends!
Lloyds (LSE:LLOY) shares often feature highly on the lists of most popular shares with retail investors. Given its reputation as a lucrative and reliable dividend share, on the one hand I’m not surprised.
As a retail bank, Lloyds enjoys a steady flow of income through account fees, loan interest and transaction charges that allows it to pay a consistent dividend. It can keep its progressive policy going even when revenues fall and credit impairments increase during economic downturns.
Today its forward dividend yield is 4.6%, and for 2025 it rises to 5.5%. And yet while these figures comfortably beat the Footsie average of 3.4%, I’m not tempted to touch the Black Horse Bank with a bargepole.
Here are three reasons why.
1. Rough ride
Lloyds is facing a staggering misconduct bill from the Financial Conduct Authority (FCA). It relates to an investigation into whether commissions paid from motor finance providers to car dealers without the customer’s knowledge are lawful.
To date, the bank’s set aside roughly £1.2bn to cover possible costs. But if the Supreme Court rules against discretionary commissions later this month, the eventual penalty could be several times that amount.
A survey from Slater and Gordon shows that 23m people who agreed a car loan between 2007 and 2021 think they may be eligible for compensation. If this proves accurate, and the case goes against Lloyds, the impact on its share price and dividend could be eye-watering.
2. Rate pressure
Interest rates are critical for banks’ profitability. The higher the net interest margin (NIM) — that is, the difference between what they charge borrowers and what they pay savers — the better.
The problem is that Lloyds’ NIM is already worryingly low, at 3.03% in Q1. And it’s in danger of slipping sharply as the Bank of England (BoE) gears up for more interest rate cuts.
Cuts worth half a percentage point are tipped by City analysts in the second half of 2025 alone.
On the plus side, BoE rate reductions could stimulate loan demand and lessen bad loans. They could also boost the critical housing market. But on balance, I think these positives may be outweighed by the negatives.
3. Poor long-term growth
I’m also concerned about Lloyds’ long-term growth prospects versus other FTSE 100 banks.
Unlike HSBC and Standard Chartered, for instance, it doesn’t have weighty exposure to international markets. As a consequence, it faces a struggle to increase profits as the UK economy faces a prolonged period of low growth. By contrast, both of those other blue-chip operators have significant exposure to fast-growing Asia.
I don’t think this is reflected in Lloyds’ valuation. In fact, at 11.6 times, its forward price-to-earnings (P/E) ratio is actually higher than those of HSBC (9.7 times) and StanChart (9.9 times).
Added to this, HSBC also carries better near-term dividend yields, of 5.5% and 5.8% for 2025 and 2026. Without a doubt, I’d much rather buy one of these emerging market banks for my portfolio today.
The post 3 reasons I’m avoiding Lloyds shares despite their huge dividends! appeared first on The Motley Fool UK.
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HSBC Holdings is an advertising partner of Motley Fool Money. Royston Wild has positions in HSBC Holdings. The Motley Fool UK has recommended Aj Bell Plc, Barclays Plc, HSBC Holdings, Lloyds Banking Group Plc, and Standard Chartered 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.
