How Lloyds Banking Group plc Could Hit 160p!

A steep rise in the shares of Lloyds Banking Group plc (LON:LLOY) hinge on buyback, but it’s unclear where the money will come from, argues Alessandro Pasetti.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

You must have heard it a million times: the obvious choice for value hunters in this market is Lloyds (LSE: LLOY) (NYSE: LYG.US) — a bank stock that hasn’t been one of my favourite picks for a very long time.

To be honest, I haven’t made up my mind yet, but trends are surely encouraging for its shareholders and should not be overlooked. Similarly, however, other calculations should be taken into account when deciding whether to snap up its shares or not. 

UK Government Stake Sale

I have been sceptical about the speed at which the UK government would have managed to trim its stake in Lloyds — until recently. Latest news has surprised me indeed, just as it did its latest quarterly results.

In late February, the UK government said that it had sold 1% of Lloyds stock, reducing its stake to 23.9%. In less than four months, its holding has now dropped to below 17% of the bank’s equity capital, it emerged on Tuesday. During the period, the shares have risen 12%.

Most of the rise must be attributed to its latest trading update and the outcome of the General Election rather than to the UK government’s strategy, but the good news is that Lloyds may return to full private ownership by the end of the first quarter 2016, well ahead of schedule — and by then, it may even command a premium to its current valuation of 85p a share. 

So, is the tide turning? 

(As a reminder, if you had bought Lloyds in the late spring/summer of 2009, you’d have recorded a pre-tax capital gain very close to zero for the period ending March 2015.)

Lloyds At 160p 

While I think that a big rise in dividends and buybacks may be premature (many analysts would disagree, of course), I’d focus on trailing trends and fundamentals. 

Lloyds traded around 160p a share in September 2008 when Lehman Brothers filed for bankruptcy. 

In 2008, earnings per share (EPS) plunged 39% to 29.7p from 48.6p year on year; its profits halved and returns plunged, according to its annual results, which were released on 27 February 2009 — at that point, Lloyds traded at 37p a share as the full extent of the damage caused by the banking crisis had become apparent. 

Anybody who had invested in Lloyds in early September 2008 would have purchased its stock at around 200p, securing an investment that not only would have generated EPS of 29.7p for the year, but one that paid out its last dividend (11.4p a share, down 70% year on year) until recently.  

How Can You Miss The Opportunity?

Back to these days, and Lloyds is broadly expected to report EPS of 5.3p, 7.4p and 8.3p in 2015, 2016 and 2017, respectively, on the back of rising net profits (from £3.7bn in 2015 to £5.9bn in 2017).

Assuming Lloyds can achieve such an impressive growth rate for its bottom line, you should consider that it would have to shrink its total number of shares outstanding by 70% to around 20 billion of shares outstanding to be able, some 10 years later, to generate rising 2015-2017 EPS of between 18.5p and 29.5p over the next three years (as a reminder, 2008 EPS stood at just below 30p). 

Of course, nobody wanted to hold bank stocks six years ago — but for each penny invested you’d have had a claim on a much higher portion of net earnings in 2008. 

Now, assuming a 10% discount to its current market price, the bank would have to buy back 50bn of its own shares, spending £38bn, or more than £10bn a year, assuming buybacks are held over the next three years, to generate 2017 EPS in line with the level that it recored in 2008. 

For me, the obvious question is: where is the bank going to get that money from, particularly if it aims to raise its payout ratio over time? 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Jumbo jet preparing to take off on a runway at sunset
Investing Articles

Down 70%+ since 2020, is IAG’s share price an unmissable bargain?

IAG’s share price is still down around 73% from its pre-Covid level, but with the business performing well last year,…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£17,000 of shares in the FTSE 100 dividend giant can make me £18,874 every year in passive income!

This FTSE 100 dividend superstar has an 8.8% yield with dividends projected to rise. It looks very undervalued to me…

Read more »

Investing Articles

2 top UK growth stocks I’m buying for my Stocks and Shares ISA in July

Looking for UK-listed growth firms to add to a Stocks and Shares ISA? Our writer highlights two he's planning to…

Read more »

artificial intelligence investing algorithms
Investing Articles

This overvalued growth stock makes Nvidia look cheap!

ARM Holdings is a growth stock that’s benefitted from the AI rally. Muhammad Cheema takes a look at whether this…

Read more »

Investing Articles

1 penny stock I’d buy today while it’s 63p

This penny stock's down 70% since last March, yet could be set for a big comeback as the firm rebuilds…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Buying 8,617 Legal & General shares would give me a stunning income of £1,840 a year

Legal & General shares offer one of the highest dividend yields on the entire FTSE 100. Harvey Jones wants to…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

£25k to invest? Here’s how I’d try to turn that into a second income of £12,578 a year!

If Harvey Jones had a lump sum to invest today he'd go flat out buying top FTSE 100 second income…

Read more »

Union Jack flag in a castle shaped sandcastle on a beautiful beach in brilliant sunshine
Investing Articles

2 lesser-known dividend stocks to consider this summer

Summer is here and global markets could be heading for a period of subdued trading. But our writer thinks there…

Read more »