In a move that will warm the cockles of those of us old enough to remember Sid, on Monday the government confirmed that it is to go ahead with a new sale of Lloyds Banking Group (LSE: LLOY)(NYSE: LYG.US) shares to retail investors.
The Treasury said that the shares will be offered to the public “in the next 12 months“, adding that its current schedule of selling shares that was previously set to end in June will continue until the end of December.
Another £9bn to go
It’s all part of Chancellor George Osborne’s plan to offload another £9bn in Lloyds shares between now and 2016, with the government having also revealed that so far it has reduced its holding in Lloyds to 19% from the 41% it took control of in the banking crisis. £20bn of public money was originally invested in buying Lloyds shares, and we’ve recouped a little over half of that so far — so it looks like the taxpayers’ coffers are going to end up in a reasonable position by the time the whole lot is back in private hands.
The question is, when the new share offer is made, should we sign up for it? Well, the pricing is expected to be at a discount to the market price at the time of the sale, and with Lloyds being clearly undervalued right now in my opinion, I’d give it a big thumbs-up.
Back to health
Lloyds has bounced back to profit, and last year it paid its first dividend since the crisis. Admittedly it was only a second-half dividend of 0.75p that yielded an overall 1%, but it marked the crucial confirmation from the PRA that Lloyds’ liquidity was sufficiently healthy for it to be allowed to resume handing out cash to shareholders.
This year’s dividend should reach a more significant 3.2%, with analysts having penciled in a 4.8% yield for 2016. And with earnings forecasts putting Lloyds shares on a forward P/E of under 11 for this year and next, when the long-term FTSE average stands at around 14, I see Lloyds shares as cheap at today’s market valuation.
A discount to that could make them an unmissable bargain. But don’t forget that between now and the time of the next sale, the market price might well appreciate some more — at 89p it’s already up 13% over 12 months and has almost trebled since its low point of 2011.
The right reason
And that beings me to the proper way to evaluate the next government sell-off — you should make your decision based on your own understanding of the fundamental value of Lloyds, not solely because the government is offering a cut-price sale.