The general weakness in the markets has created an opportunity to snap up some top FTSE 100 blue chips.
Shares of Lloyds (LSE: LLOY), for instance, made a post-financial-crisis high of 89p in May, but are trading at 74p, as I write.
Here are three reasons why investors might want to consider loading up on Lloyds right now.
Safe and sound
Lloyds’ first-quarter results on 1 May were well received, as they offered further confirmation of the bank’s progress in re-establishing itself as a well-capitalised, safe traditional lender.
Lloyds reported that its common equity tier 1 ratio — a measure of capital strength — was up to a muscular 13.4%. Meanwhile, run-off assets (assets outside the company’s conservative risk appetite) were down to £15bn, representing a mere 1.8% of total assets.
Fines and customer redress for legacy misdemeanours haven’t quite run their course yet, but light at the end of the tunnel is within sight. Furthermore, an underlying return on equity running at 16%, and an already-healthy cost:income ratio of 48%, which is expected to fall still further, demonstrate that a safe-and-sound Lloyds can still make a very decent return for shareholders.
The price is right
Having fallen back from 89p, the shares at 74p look really good value. Investors were paying more than 74p for Lloyds this time two years ago when immediate earnings prospects were not as strong as they are now. Lloyds currently trades on a 12-month forecast price-to-earnings ratio of 9.2, which is below the bargain threshold of 10 and well below the long-term FTSE 100 average of 14.
The asset valuation — 1.33x tangible net assets — isn’t quite as compelling as the earnings rating, but I reckon there’s scope for this to rise as high as 2x. Indeed, arguably, with the levels of regulatory scrutiny and safety capital required these days, a steady traditional lender, such as Lloyds, could come to be more highly rated still when its legacy issues are firmly in the past.
The government’s bailout stake in Lloyds is one of the legacies still to clear, but with it now being down to 13% and the bank having resumed paying dividends, institutional demand for the company’s shares should increase further going forward. Just this morning, I’ve read of one fund whose biggest summer buy has been Lloyds.
Divvy up
The dividend is a big reason why there should be growing institutional demand for Lloyds’ shares. In recent years, Lloyds has held almost zero appeal for big pension funds, and retail managers with an equity income mandate. But that’s changed now that the bank has re-started dividends.
Lloyds’ dividend outlook is the third reason why I believe private investors should be seriously considering buying into this bargain blue chip at the present time. The forecast 12-month yield is 4.8% right now, compared with 4.0% at the 89p share-price high of earlier this year. Over time, that 0.8% difference will have a significant cumulative effect on the income you receive, and a huge compounding effect, if you’re reinvesting the dividends.
