On 11 July this year, the Daily Mail reported that ace investor Neil Woodford was eyeing up a stake in Lloyds Banking (LSE: LLOY) (NYSE: LYG.US).
The Mail claimed it had been told by ‘City sources’ that Woodford’s Invesco Perpetual fund management group was “in talks to take a stake of up to 10 per cent” of the part-taxpayer-owned bank.
Woodford, who famously sold out of banks before the financial crisis, was quick to scotch the rumour:
“Reports of my imminent return to the banks sector through a purchase of some of the Government’s stake in Lloyds are not correct. I have absolutely no intention of buying a stake in Lloyds or any other UK-focused high street bank at the present time and don’t expect to do so for some time”.
Woodford went on to itemise the factors that put him off buying:
- “cannot quantify the risk of dilution through future capital raisings”;
- “concerned about the extent of loan losses sitting in these banks’ balance sheets, awaiting recognition in the coming years as and when they have enough capital to absorb them”; and
- “prospect of dividends from the likes of Lloyds during this process is remote”.
We might reasonably infer that the converse of these factors could lead Woodford to consider investing in Lloyds. While at the time he was writing Woodford believed the negatives had “several years to run”, subsequent newsflow from Lloyds has been strong, with progress ahead of targets.
In particular — for their relevance to Woodford’s concerns — Lloyds reported within its half-year results announced on 1 August:
- “Capital build ahead of expectations with fully loaded core tier 1 ratio of 9.6 per cent; now targeting fully loaded core tier 1 ratio of above 10 per cent by year end, twelve months ahead of plan”;
- “Non-core asset reduction of £17 billion, ahead of plan and capital accretive. Now targeting non-core assets of less than £70 billion by end 2013, a year earlier than previously expected”; and
- “As a consequence of the significant progress made in strengthening the balance sheet we now expect to commence discussions with our regulators in the second half of this year on the timetable and conditions for dividend payments”.
Since the release of those results, non-core asset disposals have continued apace, and the government has also begun to sell down its stake in the bank, widely seen as a precursor for resuming dividends.
More analysts are now expecting Lloyds to declare a dividend for the current year when it announces its results next February. As a result, the consensus forecast dividend has gone up to 0.70p a share from 0.19p six months ago.
Indeed, JP Morgan has recently come out and said it not only expects the dividend to restart this year, but also that Lloyds will be the best capitalised UK bank by 2015.
Lloyds may not be investible right now in Woodford’s eyes, but if the Black Horse continues to leap and bound ahead of targets and expectations, it could assuage the master investor’s concerns rather sooner than the “several years” he referred to during July.