Investors should wait for a coming discount in Lloyds Banking Group over the next year before buying or adding to the stock, according to analysts at IG and The Share Centre.
The government today confirmed it will offer up a significant portion of its stake in Lloyds, which it bailed out during the 2008 financial crisis by injecting £20bn into the group and receiving a 41 per cent stake in the bank in return.
It started selling its Lloyds shares in 2013 and now owns just under 20 per cent, with chancellor George Osborne today pledging to sell a further £9bn of shares in the 2015-16 year.
Lloyds’ share price starting heading south in 2007 as fears over high levels of leveraged debt flooded the marketplace and investors started to sell down exposure.
The bank is still down from this level but has made some headway since its bottom in February 2009.
Performance of stock and index since Feb 2007
Source: FE Analytics
Alastair McCaig, analyst at IG, says investors are unlikely to see any quick return to these levels but adds that there is still a compelling case to buy into Lloyds from an income perspective.
However, he says the prospect of a discount on the government’s stock as it comes to market is worth waiting for.
“As far as the investment community is concerned there are plenty of attractions about Lloyds. The fact that they have had less of a direct influence from the government as to how they have restructured themselves than RBS makes them a bit of a halfway house between the Barclays and Royal Bank of Scotland’s picture,” he said.
“In the dividend paying arena Lloyds is very attractive as an income paying vehicle, particularly when you consider the yield the FTSE 100 is only around 3.5 per cent. The yield that can either be acquired from sovereign debt or even just from cash deposits makes those two alternatives unattractive.”
“We would not be surprised to see investors look to increase their exposure, especially given the alternative banking stocks in the FTSE 100 being the likes of Barclays – which has aggressively moved down towards retail and possibly restricted their earnings growth potential by curtailing their investment banking exposure.”
McCaig says retail investors requiring a small stake should “hang around and wait” at the prospect of a discount when the shares are sold, as the government has said it will do this rather than offering institutional investors a discount like it did with the sale of Royal Mail.
However, for those wishing to buy a larger stake he says there is no time like the present.
“The smaller retail investor may be better of waiting, however as that price will effectively be a cap on the market share price anyway and we won’t see them migrate too far away from that place,” he explained.
“If we have looked at the template we have seen in other government share issues in the recent past – thinking back to Royal Mail for instance – and you are requiring a sizable holding, it would be better to err on the side of caution and acquire the majority of your stake in the free to trade market rather than waiting to see what cutbacks there might be on your requested entitlement.”
Graham Spooner (pictured), analyst at The Share Centre, agrees, believing investors are unlikely to get a better deal before the government floats its holding with a discount.
“Should you wait 12 months? Yes, I don’t see any harm in doing that because if they are going to be sold at a small discount, why not wait and hedge your bets a little bit. Unless the share price goes up dramatically but that is unlikely. You might as well wait.”
“It has received a couple of boosts off the back of the Conservative win and its last quarter results. The shares have outperformed significantly over the last month or two but it is not out of the woods yet. You never really know what is around the corner with banks and investors are still pretty nervy.”
The stock is up 12.15 per cent over three months, seeing rapid upside around the general election period.
Performance of stock and index over 3 months
Source: FE Analytics
McCaig adds that Lloyds should be in a better place to see further upside than its rivals in the UK market.
“It has been widely perceived that the government would look to extract themselves from effectively being a bank as soon as they could. As far as RBS is concerned they could be tied in there for some considerable time and it has always been seen that Lloyds would be the easier of the two vehicles to remove themselves from,” he explained.
“The fact that the share price in the market is above the net purchase price is obviously an advantage because any losses at RBS are going to be swallowed up. The only other alternative would be HSBC but they are much more of an Asian market play rather than a UK/European arena. That is where Lloyds are offering themselves up as an attractive investment.”