UBS reaffirms Lloyds as top-pick, highlights high dividend yield

UBS reaffirmed Lloyd´s Banking Group as its 'top-pick' on Friday thanks to the lender´s capital generation targets, which in its opinion underwrote a dividend yield of over 8% in a Footsie that was "increasingly starved" of payouts.

Analyst Jason Napier highlighted that the total dividend payout of £2.0bn for 2015, against a statutory profit of £0.5bn, "should provide significant reassurance to investors in Lloyds (and RBS) that the regulator is comfortable with current capital levels."

Lloyds´s 200 basis point target for capital generation per year was worth 6p a share in payouts, Napier said in a research note sent to clients.

Furthermore, the lender´s guidance for loan losses in 2016 was as expected, while net interest margins were expected to outpace consensus estimates.

To take note of, UBS believed fears for the latter were much worse than the company-collated consensus of 2.65%.

In the analyst´s opinion, Lloyds also got too little credit for its ability to manage front and back book margins for the benefit of its shareholders.

Management had also targeted continued improvement in the bank´s cost/income ratio for every year between 2016 to 2020 - despite the low interest rate environment.

"LBG is trading with a yield well over 8% each year from 2016-2020. We have the stock at 1.2x tangible net asset value for a 14% forecast return on tangible equity. We think LBG is good value and retain it as our top pick in the UK. Our sum of the parts-derived target price remains 88p – 30% capital upside."