Small investors lured with 5% discount, one-year bonus and predictions of big dividends in the long term, writes Jeff Salway
Income-hungry savers are leading the surge in demand for shares in Lloyds Banking Group in the biggest public offer since the “Tell Sid” campaign nearly 30 years ago.
Interest in discounted shares in the state-backed bank has already exceeded expectations despite regulatory concerns including ongoing claims for payment protection insurance (PPI) mis-selling.
The share sale was announced seven years to the month after Lloyds was bailed out by the government, when the bank’s rescue of stricken HBOS left it on the brink of collapse. The Lloyds sell-off began in 2013, taking the taxpayer’s stake in the bank from 43 per cent to less than 12 per cent.
The vast majority of the shares already sold have gone (at discounted prices) to institutional investors, such as pension funds, but the latest sale – likely to take place in March next year – will target ordinary savers and pension investors. More than 60,000 people registered their interest within 24 hours of the offer being announced, attracted by a 5 per cent discount and the option of getting a free share for each 10 bought if they are held for more than a year (to a maximum of £200 in bonus shares).
The government has said that investors applying for less than £1,000 of shares will take priority in the sale. More than £2 billion of Lloyds shares will be available, the biggest since the “tell Sid” public offering for British Gas in the late 1980s.
So what’s the main selling point? For many investors, such as those taking advantage of recent pension reforms to remain invested in retirement, it will be the income potential. Right now Lloyds pays just 0.97 per cent in dividends, but analysts anticipate a sharp increase.
One leading fund manager, Alex Wright of the Fidelity Special Values Investment Trust, said he was attracted to the stock by the prospect of a yield of 7 per cent by 2017.
“Income is one of the potential attractions of Lloyds, which has resumed dividend payments and expects to increase them steadily,” said William Forsyth, investment manager and principal at Charlotte Square Investment Managers. “The yield suggested by Wright depends on the eventual selling price next year and also on the level of payout [of net profits].”
The cap on bonus shares could easily be circumvented.
“The answer may be to mobilise family members to each apply for, say, £1,000 of stock, rather than large subscriptions, which may be scaled back or even rejected,” said Forsyth. “There are also suggestions that each family member should use their own email address.”
The hope is that by offering bonus shares to those keeping the shares for a year or more the offer will be taken up by long-term investors rather than speculators.
Gordon Forbes, managing director and chartered financial planner at Caledonia Asset Management, said: “While there may be a short-term uplift as the share price settles, this is probably an investment more suited to investors with a medium to long-term horizon who are interested more in dividend yield rather than capital accumulation.
“The bank has worked hard to return to profit and there are good dividend forecasts circulating, but these may be over the longer term, as future growth will be tempered by the fact that the UK is a mature and tightly regulated market,” said Forbes.
Among the issues still to be dealt with by Lloyds is its part in the PPI mis-selling scandal. The bank was one of the biggest culprits and was fined a record £117m in June for poor handling of complaints. That came on the back of fines totalling £218m in 2014 for its role in the rigging of international bank rates (Libor).
There have also been allegations from MPs that Lloyds is among several banks to have deliberately forced companies into liquidation in the wake of the financial crisis, to the benefit of associated parties.
“Until recently a lot of money raised by Lloyds in profits has been going to pay regulatory fines, PPI claims, and restructuring to meet tighter compliance standards,” said Forbes. “However, the recent announcement by the FCA that it is consulting on an end date for claims for PPI may mean that in future more of the cash in the bank is available for return to shareholders as dividends.”
Share sentiment could also be affected by the headwinds the economy faces, with the emerging markets slowdown and a sluggish US economy causing particular concern.
“Shares in UK banks are popularly bought with one eye on national economic performance as success and growth there is often reflected in increased growth and profitability in the banking sector,” said Forbes.
Ultimately, however, investors need to keep in mind that while the share offer might be attractive, there’s still the risk of capital losses should the bank or the economy run into difficulties again.
“The discount of 5 per cent to the principal market price and bonus of one share for every 10 held over the longer term is a clever move by the government that may tempt some,” said Forbes. “But investors should think carefully and only buy shares if they feel comfortable with the investment, and are able to accommodate the possibility of losses as well as gains over time.”