Get set for Spring 2016, when private investors can take advantage of the Government’s £2bn share flotation of Lloyds Banking Group (LSE: LLOY). Chancellor George Osborne is calling it the biggest privatisation for 20 years and it is about time ordinary taxpayers were given the chance to benefit from a sell-off that has so far been reserved for institutional investors.
After the massively oversubscribed sale of Royal Mail in 2013 we can expect even more excitement this time, and Fools will no doubt be lining up to buy what is already the UK’s most popular stock, with 2.7 million private shareholders. The flotation is squarely aimed at small scale investors, prioritising those investing less than £1,000.
Foolish Flotation
With the shares selling at a 5% discount to the market price there is a good incentive to get stuck in. And that isn’t the only spur, with investors getting one bonus share for every 10 shares they hold for a year, up to a maximum £200. So effectively, you are getting a 15% discount at issue.
This is clearly designed to encourage long-term investing over speculative trading, something we warmly applaud at the Fool. But this is only a sideshow, because the real long-term benefit of investing in Lloyds doesn’t depend on the government at all.
Income Fun
Before the financial crisis, investors saw Lloyds as an income machine. Reinvesting its generous dividends for growth year after year was seen as a safe and steady way to get rich. The dividends stopped after the taxpayer bailout and have only just re-started. Today, you get a measly yield of just 0.97%, worse than the return on a halfway decent savings account, and with far more risk. But it won’t be that low for long.
Lloyds is on a forecast yield of 3.3% for the end of this year. By the end of 2016, that is likely to have rapidly risen to 5.1%, more than 10 times current base rate. And it isn’t expected to stop there, with some analysts expecting it to hit 7% within two years.
The bank has now largely rebuilt its capital ratios, which frees it to use its spare cash to reward investors instead. It is targeting payouts of at least 50% of sustainable earnings through ordinary dividends and special payments. With recent interim results showing profits up 15% to £4.8bn, it should have scope for largesse.
Bye-Bye PPI
Better still, the future is looking a little brighter, with bad debts at low levels, and a mooted 2018 deadline for new PPI mis-selling claims, which have cost it £13.4bn (and counting). Lloyds should even benefit when interest rates start rising, which will allow it to boost margins by hiking its lending rates faster than savings rates.
Lloyds has deeper exposure to the booming UK than any other bank, which is currently serving it well, but that may prove a pain if the domestic economy slows. The share price has doubled in the last three years but amazingly, it still trades at a tempting 9.45 times earnings.
In fact, it seems daft to wait until the Spring, Lloyds looks good value today. You can always buy more next year. Then sit back and let income flow. Who knows, you might see some capital growth as well.
