Right now, I’m analysing some of the most popular companies in the FTSE 100 to establish if they are attractive long-term buy and forget investments.
Today. I’m looking at Lloyds (LSE: LLOY) (NYSE: LYG.US).
What is the sustainable competitive advantage?
Lloyds used to be respected as one of the country’s oldest and largest banks, with 270 years of history and the widest network of branches. The bank was also the UK’s biggest mortgage lender.
However, the company’s reputation was seriously damaged by its losses suffered during the financial crisis and this has alienated many customers.
That said, Lloyds is still a cornerstone of the country’s financial landscape, so it is unlikely that the bank will note a drastic fall in the number of its customers.
Still, the bank’s profits are somewhat constrained by the inability to establish its own profit margins on the products that it sells to customers. In particular, the rate of interest that Lloyds can charge and offer to customers is inked to the Bank of England’s base rate, which the firm must adhere to.
Moreover, unlike some of its peers, Lloyds does not have a large investment banking division, which can be highly lucrative. For example, peer Barclays‘ capital markets division, Barclays Capital, was responsible for the majority of the banks profits during the first half of this year.
Company’s long-term outlook?
The outlook for Lloyds over the longer term is almost impossible to predict. Regulation and miss-selling fines are making it harder for the bank to return profit and uncertainty surrounding government intervention, is clouding the banks outlook — never a good trait in a buy-and-forget investment.
What’s more, an increasing trend towards peer-to-peer lending and smaller banking providers, are all factors that could affect Lloyds’ dominance over the high street and profitability in the medium term.
In addition, Lloyds has been forced to slim down both its portfolio of high-street branches and mortgage book, to some extent cutting the bank’s dominance over the two sectors where it used to have control.
Having said all of that, it must be said that the demand for banking services within the UK is unlikely to slow over the long term and as a key provider in the market, Lloyds is likely to see a sustained demand for its services.
Foolish summary
All in all, despite Lloyds’ dominance in the UK’s financial sector, the company’s future is too dependent upon regulation and government intervention to be a good share to buy and forget.
So overall, I rate Lloyds as very poor share to buy and forget.
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In the meantime, please stay tuned for my next FTSE 100 verdict
> Rupert does not own any share mentioned in this article.
