The Lloyds Banking Group (LSE: LLOY) share price has been below book value for years.
That inspired a Motley Fool reader to ask if we have any thoughts on why Lloyds doesn’t break itself up, and release shareholder value that way. It’s a good question.
Lloyds is on a Price to Book ratio of only 0.6. That means all of its shares together would only add up to 60% of its assets, with the rest seemingly going begging.
If Lloyds disposed of its assets, maybe it could hand out up to 70p per share to shareholders? That would be a fat profit on today’s share price. So why doesn’t it do that?
Practical problems
Sometimes a company will sell a non-core business to try to boost efficiency. But Lloyds already did that after the financial crisis, turning to UK retail banking and mortgages.
So it looks like it’s actually the bank’s core business that investors are valuing so lowly.
But could it really sell all its mortgages to another lender at book value? Especially when Lloyds has already set aside more than £600m in provisions for possible bad debts in the first half of this year? And the property outlook isn’t great?
Book value is one thing, but the actual cash a company could generate from a break-up is something else.
Value vs performance
Tangible equity is considered a more realistic measure. It’s often used as an estimate of the liquidation value of a company, or what might be left for shareholders if it calls it a day.
For Lloyds, it was about £31bn at 30 June. That puts the stock at about 88% of tangible equity value, a fair bit higher than that 60% of book value.
In the first half of 2023, Lloyds reported a return on tangible equity of 16.6%, and expects a full-year figure of more than 14%. I’d say anything above 12% is fair for a bank.
On that measure, I think Lloyds is using its assets well.
What should Lloyds do?
I believe a company should usually ignore where its share price goes, and focus on its business.
That might change if there’s a chance of a takeover. But I can’t see another bank wanting to take out Lloyds, not when their own stock is likely to be valued lowly too.
And if a firm has spare cash, it can use it for a share buyback to raise shareholder value. That should boost future earnings and dividends per share. Lloyds has been doing just that.
There’s always the option of handing back spare cash as a special dividend. But buybacks can build better long-term value when the shares are below book value.
What should investors do?
I think times when share prices are lower than book value are good for long-term shareholders. It means we can keep buying more shares while they’re cheap, and lock in good dividends.
Lloyds is on a forecast dividend yield of 6% for 2023.
That’s enough to treble the value of an investment in 20 years. And continuing to buy while the shares are down could make even more gains. I won’t get that from a one-off asset sale.
