Questor: Lloyds is on course to yield 6.3pc in two years so it’s a hold for our Income Portfolio

Lloyds’ ordinary shares

The bank announced profits before tax for the first three months of 2018 of £1.6bn, a 23pc rise on the same period last year. If exceptional items such as PPI compensation of £90m are excluded, profits are £2bn, against £1.9bn last year.

Other measures, such as the cost to income ratio, the net interest margin (the gap between what it pays depositors and charges borrowers) and its return on capital also improved.

“This is a bank in very rude health,” Ian Gordon, Investec’s experienced banking analyst, told Questor.

• Read Questor’s rules of investment before you follow our tips. twitter.com/DTquestor

Of greatest interest to this column, of course, is the future for the dividend and Gordon said he expected it to grow by 10pc a year. This would imply a full-year payment of 3.4p for this year, 3.75p for 2019 and 4.1p for 2020, he said, or yield figures of 5.2pc for 2018, 5.8pc for 2019 and 6.3pc for 2020 for investors who buy at the current share price.

He also predicted that Lloyds would spend more on buying back its own shares, further proof of its strong capital position.

The bank’s key capital ratio, the “CET1”, would remain above 14pc despite these increased distributions to shareholders, Gordon said.

“I expect it to be the only FTSE 100 bank to produce returns on capital of more than 10pc this year,” he added. “In this respect, it is three years ahead of its peers.”

A “strong hold” for the Income Portfolio.

• Questor: Lloyds now yields 4.4pc but there’s plenty of scope for capital growth on top

Update: preference shares

The hitherto sleepy world of preference shares was thrown into chaos last month when Aviva, the insurer, said it had the right to cancel its prefs at par value.

The price of Aviva’s own prefs fell sharply from levels of about 70pc above par and many preference shares issued by other companies followed suit. Aviva quickly reversed course but preference share prices have not fully recovered. Investors who had previously taken the “irredeemable” nature of preference shares on trust no longer saw the shares’ permanence as watertight.

For example, Standard Chartered’s 7.375pc prefs traded at about 140p before Aviva’s announcement but yesterday the price was 10pc lower at 126p. Aviva’s own 8.375pc issue has fallen by 11.3pc from 168.5p to 149.5p since its initial announcement.

The City regulator has stepped into the controversy, writing to pref issuers to ask them to clarify investors’ rights and publicise plans to cancel preference shares. This is a welcome step but we will have to see how issuers respond.

So far only Aviva itself, Ecclesiastical – which also pledged not to cancel its prefs – and now Lloyds have said anything.

George Culmer, Lloyds’ chief financial officer, told reporters on Wednesday: “[There has been] absolutely no discussion on these and absolutely no plans to cancel these irredeemable preference shares through a reduction in capital.”

Questor regards this as wholly inadequate; plans can change at any time. What is needed is a formal statement in writing, ideally in legal documents such as the prefs’ terms and conditions, or the bank’s articles of association, that its preference shares are unequivocally perpetual and that only a vote by the holders of a particular preference share issue can lead to their cancellation at par value.

Lloyds’ obligation to its pref holders is especially strong: all its preference shares in issue were swapped for HBOS prefs, whose terms did include explicit protection against cancellation, according to Mark Taber, a campaigner on behalf of holders of fixed-income securities. At the time of the swap, Lloyds said the terms of the new prefs would be “substantially similar”.

Lloyds also has “form” – it compulsorily repurchased “enhanced capital notes” at par in 2016.