The company is a basket-case. Why on earth would you throw more good money after bad?
This article forms part of our Duelling Fools feature on the Lloyds Banking Group rights issue. You can read the case for and vote in our Duelling Fools poll.
Hands up if you've lost money during the Great Stock Market Crash of 2007-8?
Yep, I thought so. Me too.
Keep your hands up if you've lost money in banking shares? Companies like Northern Rock, Bradford & Bingley, Alliance & Leicester and HBOS, all of which have now completely disappeared from the London Stock Exchange?
These firms have all served up massive losses for shareholders.
Even the survivors HBSC (LSE: HSBA), Standard Chartered (LSE: STAN) and Barclays (LSE: BARC) have destroyed billions of shareholder value. They've been hurt, but not mortally so. Each arguably has reasonable prospects in the future, the first two courtesy of their exposure to the fast-growing Asian region, the latter due to its highly profitable investment banking arm.
But still, investors have likely lost money in those banks too.
The Banking Basket Cases
Finally, there are the basket cases. They are surviving, but only due to the generosity of the government. By all rights, in a "normal" world, they'd already be bust. But this is banking. This is the lifeblood of our economy. Basket cases get second chances.
But you can't hide forever. Royal Bank of Scotland (LSE: RBS) and Lloyds Banking Group (LSE: LLOY) are sick banks, and are destined to remain in the sick for many years to come.
Investors have lost thousands and thousands of pounds from their investment in these two firms. Over the past 10 years, RBS shares are down 92% and Lloyds are down 89%.
An investment of £2,000 in 1999 would now have a capital value of around £200. That's wealth destruction of the highest order. Yet investors seem to be lining up to try their hand all over again. It's like spending £400 to upgrade your old clapped out computer when you can buy a brand new one for £300. Madness.
8 Reasons To Avoid The Lloyds Rights Issue
1. Indecipherable accounts
Have you ever tried to read a bank's annual report? See you in a few weeks. Do you know what it all means? Do you know your tier one capitals from your enhanced capital notes, your "CoCo" bonds from your convertible preference shares?
Can you tell me how much debt Lloyds has? What effect a 20% fall in house prices might have on their income and balance sheet? Life is too short, and banks are far too complicated for the vast majority of ordinary investors like you and I to invest in.
2. Falling UK house prices
Seema Shah of Capital Economics recently said house prices need to fall a further 20% to 25% percent to get back their long-term trend. What effect will that have on Lloyds ability a) to write new mortgage business and b) liquidity levels? The answer is on page 725 of the Lloyds annual report, possibly. Hint: It's not good.
3. Anaemic economic recovery
I've been banging on about this for a while now, but with unemployment riding high both here and in the US, economic recovery almost by definition is going to be sluggish. The stock market has already bounced in anticipation of a recovery, but from here on, it's going to be very slow and steady going. Even Mervyn King, Bank of England Governor recently said it's actually not a particularly strong recovery, and the economy continues to face "profound challenges".
4. Dividend yield
The Lloyds dividend yield is 0%, and will be for some time to come. Enough said.
5. Competition concerns
Lloyds bulls will point to the company's dominant position in the UK marketplace. It won't last. The EU has already asked them to sell large chunks of their UK branch network. Other competitors are already circling, including the government's own Northern Rock, Virgin Group and The Bank of China. Lloyds will simply not be allowed to dominate the UK marketplace. The government won't let it, and taxpayers won't stand for it.
6. Management
Chief Executive Eric Daniels has presided over one of the greatest wealth destructions of all time. He bought HBOS in a flash, seemingly without doing sufficient due diligence, and shareholders have paid a high price. Yet he's still in charge of the company. It beggars belief. Royal Bank of Scotland has new management, yet Lloyds has the same old people in charge. If you invest yet more money in Lloyds, you are putting your trust in Eric Daniels. He doesn't deserve it.
7. Dubai
Right on cue, and as if to emphasise my first point, Dubai's move to delay debt payments has had an immediate impact on Lloyds. If you are a shareholder, did you even know your company had a big exposure to Dubai? Precisely. According to Bloomberg, "Dubai World's creditors include HSBC, Barclays, Lloyds and RBS… Lloyds declined to comment when contacted by Bloomberg." What's next?
8. Better options elsewhere
Now for my coup de grace. Given all the uncertainties above, why on earth would anyone in their right mind consider investing yet more money in this basket case of a company?
If it wasn't for the rights issue, I'm guessing an investment in Lloyds wouldn't have even crossed your mind. All this massive £13.5 billion capital raising does is to highlight just what a mess this company is in. To put number into perspective, it is the equivalent of 1% of the UK GDP.
Just Say No To The Two-Legged Black Horse
If you are looking to put money to work in the stock market, there are plenty of other much better options.
Companies that pay good dividends, have strong competitive advantages and manageable debt levels. I'm talking about FTSE 100 companies like Admiral Group (LSE: ADM), Tesco (LSE: TSCO), Unilever (LSE: ULVR) and British Sky Broadcasting (LSE: BSY), to name just a few.
So vote no to the Lloyds rights issue.
> Bruce Jackson does not have an interest in any of the companies mentioned in this article.
