One of the key characteristics of successful investors is that they know when to sell. A good rule of thumb is that if you wouldn’t buy a share at today’s share price, you should consider selling it.
Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) is a case in point. The bank remains a popular with private investors, but I’d suggest that a good percentage should be selling. Here’s why.
1. Deep value recovery investors
Lloyds shares hit a low of around 22p in November 2011 and attracted brave value investors, as the bank’s shares traded at a hefty discount to their tangible book value.
Since then, Lloyds’ share price has risen by around 250%. That’s a pretty decent profit for a FTSE 100 share, and given that Lloyds now trades at 1.4 times its tangible book value, it’s hard to see much further upside.
In my view, now is the time to sell — you have reached your destination, and would certainly not buy the shares at today’s price of 78p.
2. On the hunt for income
Over the last year or so, income investors have bought into Lloyds in the hope of enjoying an above-average yield on cost, when the bank eventually restarts dividend payments.
The latest consensus forecasts give Lloyds shares a prospective yield of 3.8% for 2015, but there’s a problem: the bank hasn’t yet got permission to restart dividend payments, and may not do for some time.
In the meantime, your money is tied up and not generating any income: in my view, this makes no sense. Why not invest in a bank that already pays a reliable dividend?
3. Pre-2009 investors
A good number of investors are still holding on to Lloyds shares they owned before the financial crisis, perhaps in hope of eventually breaking even.
I’m afraid I’ve got bad news: this isn’t going to happen in the foreseeable future.
Lloyds shares would have to rise by at least another 150% to enable pre-crash investors to break even, and in the meantime, your money is doing nothing for you: no income, and no capital gains.
Lloyds isn’t the same business it was in 2007, either — do you really still want to be a shareholder?
Now’s the time to sell
Lloyds looks in reasonably good shape at the moment, but it’s heavily exposed to the risk of rising mortgage rates and to the lacklustre performance of the UK economy.
