Shareholders should take up their rights in Lloyds' latest share issue.
This article forms part of our Duelling Fools feature on the Lloyds Banking Group rights issue. You can also read the case against and vote in our Duelling Fools poll.
Shareholders in Lloyds Banking Group (LSE: LLOY) have had a pretty torrid 14 months. At first, the takeover of bust bank HBOS seemed a masterstroke. Then, as the full scale of the horrors hidden in its loan book began to filter out, the deal started to look rather less inspired.
The result has been series of unpleasant developments. A sickening slide in the share price, a rights issue, a huge government stakeholding, the need to pay a fortune to join the government's Asset Protection Scheme, a Europe-mandated sale of some of the newly-acquired HBOS branches and brands, news this week of a secret emergency multi-billion 'lender of last resort' loan from the government -- and now yet another rights issue, a £13.5 billion whopper.
So should investors part with yet more hard-earned cash to prop up the High Street's once-mighty Black Horse? There's only one answer: yes.
Shareholder support
Certainly, as yesterday's shareholder vote revealed, 99.75% of Lloyds' investors think so. That's the massive endorsement that existing shareholders have given the share sale.
I've no idea if my opponent in this duel is a Lloyds shareholder or not. I know that I am a Lloyds shareholder, and that I've weighed up the options very carefully, and have come to the same conclusion as the other 99.75% of Lloyds investors.
And to not take up any of the rights on offer would be stupid. Let's look at the reasons why.
Cold hard logic
To begin with, consider the alternative. Without a rights issue, the bank has little chance of escaping the expensive clutches of the government's Asset Protection Scheme. As a shareholder, I like my dividends -- and those dividends recede even further over the horizon with the government taking an even bigger stake in the bank, and the costs of a pricey government-backed insurance scheme.
So let's accept the need for a rights issue: it might be unpalatable, but there's little real alternative. The next question then, is this: do you subscribe?
Again, the answer has to be 'yes'. If you have the ready cash, and can afford to part with it, subscribing to the rights issue makes serious sense. Why is why many of the City's top fund managers are putting their hands in their pockets, too.
To start with, to not subscribe dilutes your stake in the bank, and your share of its eventual profits and dividends. In that case, your rights will be bought by someone else, who will ultimately bag those profits and dividends for themselves. And buy them they will: you'll even get a cheque for the eventual proceeds -- around £315 pounds for the average private investor.
The second reason for subscribing is the price. Even after the slide in bank shares after the shocking news from Dubai this week, these are shares that are priced to go. It's a pretty hefty discount -- 60% or so -- to the share price on Monday, before the news from Dubai, and a 40% discount to the 'ex-rights' price in the market as I write these words.
Put another way, you're being offered a pound for 60 pence. Saying 'yes' is Foolish with a capital 'F'; saying 'no' is just plain foolish.
Handsome profits ahead
Nervous? Worried about what other pitfalls might lie ahead? I confess I am, too. No sane investor blindly parts with cash without thinking of the future. Uncertain times still lie ahead; we're not out of the woods yet.
But when we are, Lloyds is well-positioned to profit handsomely from its significantly enhanced market shares. From savings accounts to mortgages, and from current accounts to credit cards, Lloyds is a major player. And -- soon -- a very profitable player, too. Taking up the rights buys a stake in those profits.
> Vote now in our Duelling Fools poll
Malcolm owns shares in Lloyds Banking Group.
