It’s been a tough decade for Lloyds (LSE: LLOY). It has endured the credit crunch, integrated the assets of struggling rival HBOS and posted vast losses. However, it’s now nearing the end of a difficult 10-year period, with its future set to be much brighter. Its current strategy, financial strength and valuation indicate that now could be the right time to buy it. However above all else, the sale of the government’s stake in the bank could signal to the market that Lloyds is well and truly back in business.
Return to normality
The sale of the government’s stake is highly significant for a few reasons. First, it sends a strong signal to investors and the wider market that Lloyds no longer requires state aid in order to remain operational. This could mean that investors begin to look more favourably on its future outlook and require a lower risk premium when valuing it.
Second, the government’s share sale will also remove uncertainty from Lloyds’ future. With the remnants of state control, there was inevitably higher political risk attached to the stock, which is likely to have counted against its valuation versus rivals. For example, potential changes in government policy or in the make-up of the government itself could have caused greater disruption for Lloyds than for rivals that don’t have the state as a shareholder.
Furthermore, Lloyds may find it has greater freedom through which to pay higher salaries or expand its business more aggressively, now that it will no longer be accountable to the government as a shareholder. This may allow it to compete on a more level playing field in future years.
An improving outlook
Of course, Lloyds has been able to deliver improved performance while having the state as a shareholder. It has transformed its balance sheet through a number of disposals and has become a highly efficient bank. This has been undertaken through painful cost reductions and some innovation. It has left the bank in a financially sound position, as proven by recent stress tests which showed Lloyds in a positive light versus many of its UK-listed peers.
Despite these changes and its upbeat outlook, it continues to trade on a low valuation. For example, it has a price-to-earnings (P/E) ratio of just 9.4. It also yields 5.5% from a dividend which is covered almost twice by profit. These figures indicate a sustained share price rise could be on the cards, while the bank could become increasingly in demand as inflation levels continue to edge higher during the remainder of 2017.
Takeaway
While the sale of the state’s shares may not make so many headlines as their original purchase did during the credit crunch, it may prove to be highly significant for Lloyds’ future outlook. It could prove to be the one catalyst required to push its share price higher, especially as it’s performing well as a business and offers good value for money, as well as a high yield. Therefore, with the government’s stake standing at less than 5%, now could be an opportune moment to buy a slice of the bank.
