Investors with a medium to longer term horizon might want to consider the government’s Lloyd’s Banking Group share offer, according to The Share Centre’s Helal Miah.
Chancellor George Osborne announced yesterday at the Conservative Party conference that the government will sell a further £2bn of its stake in Lloyds to retail investors with the extra incentive of a 5 per cent discount as well as a bonus share for every 10 held for those holding the shares for at least a year, worth up to £200.
At least £2bn of shares will be available for sale to people located in the UK. Those applying to invest less than £1,000 will be given priority.
Lloyds’ share price started plummeting in 2007 as market anxiety over its sky high debt levels led to investors selling down exposure on the back of worries that much of it was turning toxic. This led to the back being bailed out by the government, but its share price has been recovering over recent years.
Performance of stock over 8yrs
Source: FE Analytics
Miah, investment research analyst at The Share Centre, says the announcement by the government appears to be a good deal for investors.
“The deal looks attractive to those investors looking to take a medium to long-term interest in Lloyds. It is expected that the shares will be offered at a 5 per cent discount to the market price of the shares. In addition, there is likely to be a bonus share for every ten held for more than one year,” he said.
“On top of that, Lloyds’ dividend yield should start to become an added attraction for investors over time. Altogether, this could be a good deal for interest investors with a medium to long-term outlook on the stock.”
Lloyds is hugely popular with fund managers in the Investment Association universe, as a total 180 funds out of 3,400 hold it as one of their 10 largest holdings. One in five funds in IA UK Equity Income sector and more than one in three funds in the IA UK All Companies sector have a top 10 stake in the company.
Two of the biggest Lloyds bulls are Alex Wright, manager of the £2.7bn Fidelity Special Situations fund, who has 4.63 per cent in the stock, and Steve Davies, manager of the £1.6bn Jupiter UK Growth fund which has a whopping 7.3 per cent in Lloyds.
Davies recently told FE Trustnet that he was targeting the share price to appreciate to 120p over next two years due to an end in payment protection insurance (PPI) claims, no further fines from the regulator and a broadly healthier economic environment, which will allow it to substantially increase its dividends.
“Up until recently we have had a lot of money going toward fines and PPI. We are definitely not at an end there sadly but the point is we are getting to a point where enough is enough. They are going to have pay more in PPI funds but much more of it [cash] is going to come back to us as shareholders,” he said
“Lloyds started paying a dividend earlier this year and I’m hoping next year it can grow up substantially. Our target price on a two-year time horizon and when I'm thinking about Lloyds, I think it is perfectly capable of paying a dividend of 6p,” he added.
Wright, who is one of most highly regarded recovery/contrarian managers in the UK space, has been buying UK banks, mostly Lloyds and HSBC, which are his two largest stocks, as he believes this is where the greatest long-term value resides in the UK market.
The manager thinks the reams of regulation and fines that hit banks in the post financial crisis era, which that prompted massive falls in the share prices [see graph below], has caused them to reshape their business models to make them less risky and more profitable, although it does make the sector harder to analyse.
Performance of stocks 2007-10
Source: FE Analytics
Russ Mould, investment director at broker AJ Bell Broker, says the discount of 5 per cent to the principal market price and a bonus of one share for every 10 is a clever move by the government but he thinks there is very limited upside.
“Ultimately investors should only buy the shares if they feel comfortable with the investment case for Lloyds. Growth is likely to be limited, as the UK is a mature and tightly regulated market, and cost-cutting can only take the bank so far,” he said.
“The bulk of any returns from the stock is therefore likely to come from its dividend yield and anyone looking to buy Lloyds therefore needs to be confident that analyst forecasts for a pay out of around 3.9p per share in 2016 – equivalent to a yield of 5.0 per cent on the current share price – is both realistic and sustainable.”
Liz Field, chief executive of the Wealth Management Association, says the bank should be a stronger institution from a broad private ownership, which is being encouraged through the sale.
“Wider share ownership creates stronger, more accountable organisations – a positive for the government and taxpayers alike. The wider range of investors means that more people can hold management accountable for their decisions and it also means that people have a vested interest in seeing organisations like Lloyds succeed.”
Then-chancellor Alistair Darling bailed out Lloyds during the 2008 financial crisis by injecting £20bn into the share price, giving the government a 41 per cent stake in the bank.
The government started selling off shares five years later in 2013 and now owns around 10 per cent. Lloyds’ share price is down from its pre-2007 level but has made considerable progress since its trough in 2009.
Performance of stock and index since Feb 2007
Source: FE Analytics