Partly by luck, and partly by design, a chunk of the cash coming back to Vodafone (LSE: VOD) (NASDAQ: VOD.US) shareholders will find its way into Lloyds Bank (LSE: LLOY) (NYSE: LYG.US) shares. That’s because institutional and retail investors will be flush with cash from Vodafone’s return of capital just as the next tranche of Lloyds shares come to market.
That augurs well for Lloyds shares.
Retail sale
George Osborne hinted last week that retail investors would be offered shares in the next round of Lloyds privatisation. The government isn’t permitted to sell any more shares before mid-December (unless recommended by two of the three book-runners). They won’t launch a sale just before Christmas, especially to retail investors. Sensibly, a sale in the New Year would wait for Lloyds’ preliminary results in early March.
Vodafone is expecting to complete the sale of its share of Verizon Wireless in the first quarter of 2014, following which it will return capital to investors in the form of cash and shares in US-based Verizon Communications. Some of those shares will get turned into cash, too: some funds can’t hold US shares, and many private investors will baulk at holding them.
That sets the scene for the government to release the next tranche of Lloyds’ shares just as investors have a large wodge of cash looking for a home. Putting it into Lloyds could be an astute move.
Set to double
The bank’s shares are now nearly double what they were 12 months ago. They have been buoyed by a recovering UK economy, a housing market stimulated by government subsidy, and good progress on Lloyds’ internal restructuring. The overhang of future share sales is a negative drag, so releasing stock into a cash-rich market should be positive for sentiment.
Lloyds is a recovery stock, and the recovery has some legs in it yet. Longer term, it may be a decent income stock, but I doubt its prospects for growth. Its market-place is finite and there will be more competition from newly independent TSB (ex-Lloyds’ branches) and William & Glyns (ex-RBS branches) as well as new entrants.
Vodafone
Of course, Vodafone shareholders could reinvest their cash in more Vodafone shares. That would be a play on management’s ability to execute its new strategy of combining cable and mobile assets — or a gamble on Vodafone becoming a bid target.
It seems Vodafone’s management is hedging its bets. The CFO and Chief Technology Officer sold £2.6m and £1.4m worth of shares respectively last week, shrewdly catching the high of 213p. It’s not an encouraging sign, but they do both still have substantial holdings.