Investment Insider: Is there any reason for you to bank on Lloyds?
There are three criteria for buying shares ... and it fails all of them
Saturday 08 February 2014
There are three possible reasons for buying a share.
Firstly, you might believe that the share could generate a suitable income both now and in the future. In other words, it could have an attractive dividend yield, which you think might also grow over the years.
Secondly, you might believe the company could grow its profits substantially over time. Or put another way, you believe it might be a good growth stock that has the potential to outperform the overall market.
The third reason may simply be because you think the share has been overlooked and undervalued by the market. Consequently, you believe it could be a good speculative bet, especially if it looks attractive to a predator too.
Exactly which one of the three categories would Lloyds Banking Group fit into?
Lloyds Banking Group is not an income share. In fact, it hasn't paid a penny in dividends since it was part-nationalised by the UK government in 2008.
The state still owns around a third of the bank, even after the Government sold £3.2 billion worth of stock to institutional investors last September.
But there are strong hints that Lloyds could soon resume payouts to investors. The bank said it expects to apply in the second half of the year to restart dividend payments. Additionally, Lloyds expects to deliver progressive and sustainable payments to investors thereafter.
At the moment, Lloyds is pencilled in for a dividend of 1p per share this year and 2p the year after. That would imply a prospective yield of 2.5 per cent. By comparison, Barclays is already yielding 4.5 per cent and Standard Chartered is currently yielding 4.6 per cent. HSBC investors are enjoying a dividend payout of 5.5 per cent.
But given Lloyds' pledge of a progressive dividend policy, it could ratchet up its dividend payout quickly, which could bring it more in line with its peers. But that is a big "if".
Lloyds Banking Group does not show any of the characteristics investors would classify as a fast-growing company. It has never grown at break-neck pace and there is little reason to suppose it might do so now.
Lloyds is a domestic bank focussed primarily on personal and business customers. Its expertise lies in retail, commercial and corporate banking. It also sells general and life insurance, pensions and investments. None of those can be considered high-growth products.
Additionally, Lloyds has little in the way of international exposure, unlike Standard Chartered, heavily exposed to fast-growing Asia. Its profits have grown at a compound rate of around 8 per cent a year. Meanwhile, HSBC is exposed to Asia, the Middle East, North America and also Latin America. Despite a hiccup in profits in 2009, it has grown them at around 6 per cent a year.
The final reason for buying a share is that it could simply be a speculative bet. Can Lloyds recover from its disastrous merger with HBOS and its exposure to the UK housing market, or from its Payment Protection Insurance debacle, which has cost the bank almost £10bn?
Whichever way you look at Lloyds Banking, there don't appear to be compelling reasons that would make it attractive.
David Kuo is director of fool.co.uk
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