Tom Stevenson: If you’d buy Lloyds anyway, the offer provides a nice sweetener
The timing of the announcement was not entirely coincidental. There could hardly be a better start to a Conservative party conference than a discounted share sale targeted at retail investors.
George Osborne confirmed that the Government will offload the final 12% of Lloyds, held since the bank was bailed out during the financial crisis. The sale will raise a further £2bn to pay down the deficit.
Crucially, it is likely to be pitched at a price that marginally exceeds the average 73.6p that the Government paid to rescue Lloyds seven years ago. It will be hard to claim that taxpayers have not got their money back.
Arguably this is not the right question to be asking – a better one is what might have happened to the UK economy in the absence of a bailout. But the communication is clearly easier if there is no perceived transfer of wealth from the many to the few.
Lessons have also been learned from the Royal Mail sale. Retail investors will get priority so no-one will be able to claim that this is a cosy deal for big City investors (although it’s a fair challenge that the ultimate beneficiaries of funds are those same retail investors and pensioners). Those asking for less than £1,000 of shares will be favoured.
Because the shares are already priced by the market – and the sale will be at a fixed discount to the market price – it also won’t be possible to claim that they have been sold off on the cheap.
This is the final stage in a process that has already been underway for 18 months. The Government has already reduced its holding from more than 40% since March 2014. It is not exactly the end of the financial crisis but it does suggest a tentative return to normality for the UK’s financial sector.
Whether or not private investors should go for the offer is another question. On the face of it the banking sector looks inexpensive, trading at a significantly lower multiple of profits than the market as a whole, and it has the potential to offer investors a high and even growing income stream, which is attractive in a persistently low-growth, low-interest rate environment.
As long as they conduct themselves prudently, banks should be a relatively low-risk play on economic growth. Before the financial crisis they were a staple of equity income funds and there is no reason why they should not become so again.
Of course, if you believe the banks, and Lloyds in particular, are worth investing in there is no reason to wait until March. The shares are available today.
There are two reasons to go for the sale next spring. The first is the discount, which barring any adjustments by the market around the time of the sale, really is free money for those allocated shares. The second, is the one for ten loyalty offer for anyone holding the shares for a year.
Neither of these are by themselves a reason to participate in the offer. The performance of Lloyds shares over the past couple of years – basically sideways, but they fell from 89p to 72p between May and September this year – shows that a 5% discount can easily be wiped out if the story is not compelling and the market moves against you.
As we have seen this week, the sector remains in the headlines for the wrong reasons. The Government is imposing a spring 2018 deadline for people to submit compensation claims related to the payment protection insurance (PPI) scandal. To date this has cost the industry £20bn and may incur further costs of around £6bn, on the basis of the amounts that banks have already set aside for further claims.
If you would buy Lloyds shares anyway, the offer provides a nice sweetener. If you wouldn’t, then you shouldn’t let the incentive tail wag the investment dog.
Tom Stevenson is investment director at Fidelity Worldwide Investment