As a keen stock market investor, I regularly look at the trades that top fund managers such as Neil Woodford and Nick Train are making to get investing ideas.
Analysing Neil Woodford’s 31 August portfolio holdings last week, one trade stood out to me: Woodford appears to have dumped Lloyds Bank (LSE: LLOY) entirely from his Equity Income fund. While Lloyds still has a significant weighting in his smaller Income Focus fund, the FTSE 100 bank is gone completely from his flagship £6bn product after being a top holding just months ago.
Well-managed bank
I have to admit, I’m a little surprised by this trade, for several reasons. For starters, it was only in May last year that Woodford introduced Lloyds to his portfolio, meaning that he held the stock for less than 18 months. At the time, Woodford stated: “We view Lloyds as a well-managed bank with a conservative approach to its balance sheet. Its valuation looks very attractive in our view, and it has the ability to pay a very healthy and growing level of dividend.”
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Furthermore, Woodford went on to build up quite a stake in Lloyds and by the end of the last year, it was the fourth largest holding in the portfolio, with a weighting of 3.4%. Clearly, Woodford was bullish on its prospects.
Then, less than two months ago, after the bank’s half-year results, Woodford analyst Alex Correia wrote: “Overall, Lloyds is a market leading domestic bank with a strong balance sheet and surplus capital that is becoming more profitable with time and is able to return an increasing amount of capital to its shareholders. Therefore, the investment case remains strong and this recent set of results evidences continued strong execution from the business.”
So, the investment case was “strong” less than two months ago, but the stock was sold. Why?
Better value elsewhere
Well, Correia goes on to say: “Despite these ongoing attractions, we have been reducing the position in Lloyds in recent weeks, in order to take advantage of even more compelling valuation opportunities. For example, we have been keen to take advantage of material share price weakness in UK house-builders, such as Barratt Developments, Bovis and Crest Nicholson.”
So, it appears that Woodford has sold Lloyds for the same reason he recently sold Legal & General Group – he simply sees better value in other areas of the market.
Should you dump Lloyds?
So, should you follow Woodford and dump Lloyds? In my view, no. While there are risks to the investment case with Brexit uncertainty, I see value in Lloyds at the current share price. And one thing that stands out to me is the bank’s dividend prospects.
You see, in recent years, Lloyds has become a bit of a cash cow. The balance sheet is strong and with surplus capital, cash is being returned to shareholders. For example, last year it rewarded investors with a dividend of 3.05p per share and this year, a total payout of 3.33p is expected. That equates to a prospective yield of 5.4%, which looks attractive in today’s low-interest-rate environment.
With the stock trading on a low forward P/E of 8.1, I don’t think now is the time to be selling Lloyds. I’ll certainly be holding onto my shares and pocketing the big dividends on offer.
