Lloyds bank finally completed its split from TSB three years ago, and has been fully free from government share holding for a year. Is it a good investment?
Is a whopping dividend sufficient reason to buy Lloyds?
The case for is simple. At the current share price, dividends are expected to be worth around six per cent next year. Dividends have also been steadily rising since its first dividend payment in years, announced in early 2015 as part of the results for the year 2014. Profits have been rising too, and while dividends seem appealing, they are amply covered by profits.
The case against is a little more complex.
To put the dividends in context, it may be worth some detail.
The bank revealed its first dividend payment since that disastrous period when the UK government took a 43 per cent stake in the bank, as part of its performance for 2014.
The dividend performance since has been as follows:
- 2014: 0.75p
- 2015: 2.25p plus 0.5p special dividend
- 2016: 2.55p plus 0.5p special dividend
- 2017: 3.05p
- 2018: 3.43 — estimated
- 2019: 3.66 — estimated.
Pre tax Profits have risen nicely too:
- 2013: £415 million
- 2014: £1,762 million
- 2015: £1,644 million
- 2016: £4,238 million
- 2017: £5,275 million
Projected earnings per share for this year are expected to be around 2.2 times dividends.
So far, a happy story.
The share price
The share price has told a different story. It is down by a third since the spring of 2015 — at roughly the time when TSB was fully separated from Lloyds.
The share price is down by a sixth in the last five years and also down by a similar amount since May last year when the government finally rid itself of all of its remaining shareholdings in the bank.
A bit of ideology
We may want to pause for a moment and ask how the tax payer has done from the sales of the shares? Since the share price has been higher than it is now for most of the five years that the government has been selling shares it could be said that from the perspective of today, it has done pretty well.
Then again, considering the government can borrow at less than one per cent, and dividends are much higher than that, one could say it should have held.
I am not a fan of the government selling shares for ideological reasons — and worry sometimes that it sells its shares for political rather than sound financial reasons.
The big blot
Of course Lloyds’ biggest weakness in recent years has related to PPI — and the massive compensation it has paid out. Is that drawing to an end? It should be, but these things have a nasty habit of surprising and who knows what banking scandal lurks around the corner.
The problems relate to what seems like a relatively high valuation to net assets, regulation, the cost of digital transformation and weakness of the UK economy.
Unlike Barclays and RBS, it is worth more than its tangible net assets — around 17 per cent more. So that’s one weakness.
Lloyds has something of a reputation of over zealously following regulation. If the regulator says jump, Lloyds leaps as high as it can. The open banking regulation — PSD2 — has not had much affect on the bank yet, but I suspect it will, handing an advantage to challenger banks.
Now, I must make a confession. I told a porky above. I said that the bank had fully rid itself of ties to TSB just over two years ago. Well, from a shareholding point of view that is right. But until a few months ago, Lloyds and TSB — now under the ownership of Sabadell — shared the same computer system.
Lloyds like most of the large banks is saddled with an IT legacy. Smaller, newer banks — so called challenger banks — are not so encumbered. This could yet prove a major hurdle for the bank which in this respect is at a big disadvantage relative to fintechs/would be rivals. This illustrates an important point about digital technology. In the past, during the analogue age, size was vital to banks — and it was nigh on impossible for a new bank to enter the market, unless it could carve out a niche for itself. It is not like that now. This is a good example of why digital technology is so disruptive.
The bank is also highly reliant on the UK economy and in-particular the UK housing market. Whether you think this is a problem does to an extent depend on your view of the costs/benefits of Brexit.
I happen to think that the UK housing market is near peak and that if growing fears over protectionism combined with fears over a no deal Brexit, putting sterling under pressure, lead to higher inflation, forcing interest rates up, then house prices may fall quite sharply. This could hit Lloyds hard.
The Lloyds boss Portuguese banker Antonio Horta-Osorio, has been at the helm for eight years or so now, it may be time for him to move on. Some have speculated that he may be the next CEO at HSBC.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees