American investors can buy Lloyds (LSE:LLOY) stock through American Depositary Receipts (ADRs). But what if the bank’s primary listing was in the US? How much higher would the Lloyds share price be?
US listings
As noted, American investors can buy Lloyds ADRs. These are dollar-denominated and NYSE-listed with The Bank of New York Mellon as the depositary.
American investors can also purchase shares of the bank listed in the UK depending on what their brokerages offer. However, this may be more expensive than buying the ADRs because of exchange rate costs.
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While I haven’t heard any rumours that Lloyds would shift its primary listing to the US, some other UK companies are doing so.
Ashtead Group — the FTSE 100 industrial equipment provider — is the latest company to reportedly consider shifting its primary listing there. It would be following in the footsteps of Flutter, Ferguson, and CRH.
Why do firms seek US listings?
There are several reasons companies might look to list in the US. First of all, it’s a larger capital market. In fact, it’s the largest and most liquid capital market in the world with access to a broader base of institutional and retail investors.
This often translates into stronger valuations. Stocks listed in the US tend to trade at higher multiples — like the price-to-earnings (P/E) ratio — than they do in the UK.
It’s also the case that the US regulatory environment can be considered favourable, especially for growth-focused firms.
Likewise, the US market may offer more visibility, and American investors tend to be more familiar with certain growth industries, like biotech.
If Lloyds listed in America
Some British companies leaving the FTSE 350 and listing in the US tend to have businesses that are more oriented to the US economy.
That’s certainly not the case with Lloyds, which is so UK-focused that it’s often considered a barometer for the health of the UK economy.
However, the slow trend of UK firms opting to list in the US might eventually escalate into a significant exodus.
So what if Lloyds were listed there? Well, it’s currently trading at eight times earnings. Meanwhile, JPMorgan’s trading at 12.1 times and Goldman Sachs at 17.8 times.
I’d add here that Lloyds is expected to grow earnings faster than both these American banks in the coming years.
It’s certainly likely that the so-called ‘valuation gap’ would be smaller, and Lloyds would trade with higher multiples.
With a JPMorgan-matching P/E ratio of 12.1, Lloyds shares would be worth the equivalent of nearly 90p.
However, there are caveats. Global investors tend to be cautious when in comes to UK-focused stocks because our economy has been stagnating. Moreover, Lloyds doesn’t have an investment arm, and this makes it less diversified and potentially more risky than JPMorgan.
The bottom line
As a UK-focused bank, I’d be shocked to see Lloyds join the exodus any time soon. However, stranger things have happened.
If it were to happen, I’d expect Lloyds to trade at a modest discount to its US peers, but at a premium to the current share price.
