The government’s plan to offer retail investors a chance to buy shares in Lloyds Banking Group (LSE: LLOY) at a 5% discount to the market price is tempting. However, I believe there’s a good chance that investors who delay their purchase until next year will end up paying more for their shares, despite the discount.
First of all, there’s the risk that the offer will be oversubscribed (as it was with Royal Mail). If this happens then many private investors may miss out and have no choice but to buy shares on the open market.
There’s also an opportunity cost. Investors who buy today will benefit from a dividend payment plus the potential for share price gains between now and next spring. This total return could easily be worth more than the 5% discount available in the government’s share offer.
Buy now or pay later?
At today’s share price of 74p, the 5% discount offer equates to a buy price of 70.3p. If Lloyds shares rise to 78p before the offer shares are priced, then the 5% discount will be cancelled out. In the meantime, shareholders are expected to receive a 1.7p per share final dividend, which those buying through the offer won’t get.
The government is also promising a 1-for-10 bonus share offer for investors who hold their shares for more than one year. However, this is only really attractive for smaller investments, as the value of the bonus shares will be capped at £200.
We don’t know Lloyds’ share price will do in the future. This makes it impossible to say how many shares will be issued to investors as a result of the bonus share offer. I suspect that many investors will miss out on their free shares because they will sell within a year.
I also think it is quite likely that Lloyds’ shares will rise between now and the spring, leaving investors who buy at today’s lower prices with equal profits to those who buy through the offer at a higher price.
Why I think Lloyds will rise in 2016
Since February, the government has sold 14% of its stake in Lloyds. That’s around £7.4bn of shares at today’s prices. I believe that this continual supply of new shares into the market, combined with the recent market sell-off, has caused the share price to fall.
In my view, once the government has finished selling its stake in Lloyds in 2016, the bank’s shares are likely to rise. After all, despite having a strong balance sheet and healthy profit margins, Lloyds shares currently trade on a 2015 forecast P/E of just 8.8.
That’s cheaper than either Royal Bank of Scotland Group or Barclays. Lloyds shares look good value to me, especially given that the bank’s forecast dividend yield is expected to rise from 3.3% in 2015 to 5.2% in 2016. If Lloyds sticks to its plans and increases the dividend significantly next year, I’d expect this to provide some extra support for the share price.
In my view, the best time to buy Lloyds shares is now, when selling pressure remains high, ahead of the government share offer in the spring.