QUALIPORT
Lloyds TSB: Look To The Big Picture

By Maynard Paton (TMFMayn)
February 18, 2002

Carburton Street, London -- Any results that begin with an explanation of the accounting used and a list of exceptional items is likely to be a complex read. So it was with Lloyds TSB (LSE: LLOY) on Friday.

Short-term fluctuations in investment returns, exceptional restructuring costs, charges relating to the proposed acquisition of Abbey National (LSE: ANL), a provision for the redress of past purchases of pension policies, changes to the economic assumptions applied to long-term assurance business and a one-off charge relating to stakeholder pensions -- they all complicated the financial picture of Lloyds TSB between 2000 and 2001.

Bruce (TMFGoogly) covered the bank's 2001 full year results on Friday. He wrote: "The net result was an 8% decline in pre-tax profits and corresponding 8% fall in earnings per share to 45.2p. On a business as usual basis, stripping out all sorts of exceptional items, operating profits rose 6% and earnings per share by 7% to 57.6p. The one number not open to interpretation is the dividend, up 10% to 33.7p per share".

Regular readers of the Qualiport will be aware that the undisputable dividend is the cornerstone of the portfolio's investment in Lloyds TSB. To say the least, the level of profits generated at Lloyds TSB last year is of some debate.

Complex

For instance, take the exceptional restructuring costs outlined by the bank.

                                2000  2001  2002  2003  2004
                                 £m    £m    £m    £m    £m

Initial efficiency programme     188   217   130    60     -
Further initiatives                -     -   170    40     -
Total                            188   217   300   100     -

The above costs relate to a "significant efficiency programme designed to support the Group's strategic aim of driving down day-to-day operating costs to improve overall efficiency and finance ongoing high levels of investment in growth businesses."

Is such an efficiency programme truly exceptional in this industry? Banks, Lloyds TSB especially, have traditionally been regular cost-cutters.

Then comes a negative £648m short-term fluctuation in investment returns. Lloyds TSB, like many other financial businesses, relies on the stock market to generate part of its income. Should you judge the company's profit performance on just one year's investment accomplishments?

Big picture

Overall, long-term investors would do well to avoid the complexity of pinpointing a suitable 2001 earnings figure for Lloyds TSB. (Indeed, it's worth watching the Q&A session at the results presentation, as City analysts try to wrestle with the figures and delve into the minutiae of mortgages and the finer points of cost growth.) Instead, Lloyds TSB investors ought to look at the bigger picture. In terms of steady and solid long-term investments, the group is one of best bets around.

As one of the 'big four' UK banks, Lloyds TSB's retail banking operation is a decent business franchise. So much so, the government officially confirmed the lack of effective competition within this part of the industry. Sure HBOS (LSE: HBOS) is trying to become the "fifth force" in British banking. But rather rely solely on innovation to grab a foothold within the sector, it too relies on some of the cosy old tricks of the banking trade.

Relatively speaking, the UK's banking industry is one of the most predictable in terms of judging the long-term winners. While sensitive to the vagaries of the economy, and subject to some sort of acquisition faux pas, you just know that the same old faces will (unless they've been bought) still be dominating the UK financial sector in the years to come.

All in all, Lloyds TSB is very much a passive investment for the Qualiport, quite similar to the shares bought for a high yield portfolio. But there is an obvious risk taking this view: By running a concentrated portfolio, the Qualiport could be in for a tough time should the big picture style of investment overlook major earnings trouble ahead.

Dividends

But what of Lloyds TSB's valuation? As mentioned earlier, I've always considered the dependable dividend to be an acceptable valuation tool for a bank. Revisiting this article, I declared:

"An investment "bargain" is a company that:

* is large and well-established;

* has the prospect of producing a significant rise in dividend payments in years to come, and;

* has a prospective dividend yield greater than the return from Government bonds (gilts)."

At 737p per share, Lloyds TSB shares stand on a historic dividend yield of 4.6%. With brokers pencilling in a 36.7p dividend for 2002, the shares offer a prospective dividend yield of 5.0%. With five-year gilts yielding a fraction under 5%, Lloyds TSB shares appear reasonable value at the moment.

More: Lloyds TSB discussion board