Lloyds (LSE: LLOY) is currently the market’s favourite FTSE 100 bank. Few would have made that prediction seven years ago when the Black Horse was hobbled by the acquisition of HBOS and only kept on its feet at all by a government bailout.
Back then, HSBC, Barclays and particularly market-darling of the time Standard Chartered all looked better placed to make a swifter recovery from the financial crisis than Lloyds.
Yet, here we are today, with the Black Horse leading the field on most of the operating and capital ratios that are important in the business of banking.
Despite its high standing, Lloyds’ shares looks decent value at around 76p, as I’m writing. The price to tangible book value of 1.4x may be richer than that of its peers — who are trading at a discount to book — but there is scope for a higher rating still. Meanwhile, the forecast price-to-earnings ratio for 2016 is firmly in value territory at 9.5x. And, just for good measure, next year’s dividend forecast gives a juicy yield of 5.1%.
The government’s stake in Lloyds has come down from 43% at its height to little more than 10% today. Further share sales to institutions and this month’s announcement of a retail share offer in the spring will see Lloyds wholly back in private hands.
I’ve suggested Lloyds is good value today at 76p, but will you get even better value for money in the retail share offer?
What we know of the offer so far is:
“It is the government’s intention to fully exit from its Lloyds shareholding in the coming months, and as part of this at least £2bn of shares will be sold to retail investors. Members of the public will be offered a discount of 5% of the market price, with a bonus share for every 10 shares for those who hold their investment for more than a year. The value of the bonus share incentive will be capped at £200 per investor. People applying for investments of less than £1,000 will be prioritised”.
If you bought £1,000 worth of Lloyds’ shares today at 76p (and ignoring transaction costs), you’d be the owner of 1,316 shares.
But, if the shares are still 76p next spring, the 5% discount would give you an effective buy price of 72.2p. Your £1,000 would bag you 1,385 shares. Then, if you held for a year, you’d get your 1 bonus share for every 10, so an extra 138 shares. The bonus cap of £200 would be unlikely to reduce your 138 shares, because Lloyds would have to be trading at 145p come bonus time for that to happen, which seems a bit of a stretch.
So, buying today at 76p would give you 1,316 shares, but buying in the spring offer — if the market share price remained 76p — would net you 1,523 shares, including the bonus shares if you held for a year.
However, Lloyds’ shares are currently well below their year high. How would you do waiting for the spring offer, if the shares were back to their 89p high? Well, the 5% discount would give you an effective buy price of 84.55p, and your £1,000 would bag you 1,183 shares. The 1 bonus share for every 10 after a year would take you to 1,301 shares … which is not much less than the 1,316 shares you’d get at 76p in the market today (and that excludes transaction costs).
In short, then, it would appear to be worth waiting for the share offer, unless you are convinced Lloyds’ shares are going to be 90p+ come the spring.
Finally, it’s worth reiterating the government statement that “people applying for investments of less than £1,000 will be prioritised”. If you’re looking to invest substantially more than £1,000 in Lloyds, you’re unlikely to achieve it through the share offer alone.