Should You Go For The Lloyds Banking Group plc Share Sale?

So it’s official. After months of speculation, we have a date — of sorts. Sometime next Spring, the government will sell what will likely be its final tranche of shares in Lloyds Banking Group (LSE: LLOY), direct to the public.
The price? A 5% discount to the price prevailing in the market at the time of the share sale. Small investors seeking shares of £1,000 or less will get priority, and those holding their stake for a year will benefit from a 1-for-10 share bonus, up to £200, as happened with the TSB share sale of last year.
But will the sale be as profitable for investors as was TSB? In its brief stock market existence before being snapped up by Spain’s Banco de Sabadell, investors clocked up gains of 37%, once the bonus shares were taken into account.

Massive interest

Investors certainly seem to be hoping that history will repeat itself.
Within days of last week’s announcement, stockbroker Hargreaves Lansdown were reporting that over 120,000 people had signed up to express an interest in the sale.
And by the end of the week, Chancellor George Osborne was announcing that a quarter of a million would-be investors had expressed an interest, submitting their details to either the Government’s own registration website, or to one of the brokerages handling the sale.
Put in context, that’s four times higher than the number expressing an interest in Royal Mail when that was floated back in 2013.

Not a rocket

Now, let’s get one thing clear at the outset.
Lloyds isn’t going to be one of the great privatisation giveaways that we saw in the Thatcher era. Nor is it going to be a re-run of Royal Mail, which rose to 605p within weeks of its 330p flotation — an impressive 83% gain.

And the reason is quite simple: there’s already a market in the shares, with the prevailing price dictating the flotation price. Nor is there unmet pent-up demand, with City institutions scrabbling to build up a post-flotation stake.

So the share price certainly isn’t going to rocket.

Modest immediate upside

That said, the flotation marks the end of a period in which the Government has been aggressively selling-down its 43% stake in the bank. This drip-drip-drip of selling will certainly have served to keep the price depressed.
And with no more of this overhang coming onto the market, modest capital gains are at least more of a possibility than they were.
What’s more, I expect to see the bank undertake a share buyback programme at some point, which will also help to lift the price — not to mention the dividend.

What would you be buying?

Lloyds is a solid retail bank, with a strong position in a number of profitable market sectors — and, helpfully, a minimal position in a number of sectors, such as investment banking and fund management, where investors are rightly leery.
So forget the Black Horse on the high street — it’s brands such as Bank of Scotland, Scottish Widows, Halifax, Birmingham Midshires, and Lex Autolease that make a lot of the running.

And with its finances repaired after the credit crunch, low levels of bad debts, and an end in sight to PPI compensation payments, there’s a lot to like about Lloyds’ numbers.
At today’s share price, for instance, Hargreaves Lansdown has the bank trading on a yield of 3.5%, rising to 5% for 2016 and over 7% by 2018. For investors looking for a steady — and rising — income, the attractions are obvious.
Moreover, a yield of 7% in today’s terms holds out the prospect of capital gains, to bring the prevailing yield closer to the market average.
Yet three years ago, in October 2012, you could have bought Lloyds shares at under 40p, effectively half their present price.

So should you buy?

That said, the attractions of the Spring share sale are somewhat nuanced.
The price — a 5% discount to the prevailing share price in the market — is a useful fillip, but not especially generous. The bonus share scheme adds to the attractions, but is capped at £200. Plus, to earn it, you have to hold the shares for a year.
Finally, with privatisations like this, there are no brokerage charges to pay — a useful saving if you’re a small investor only buying £750 or £1000 worth of shares.
I shall probably take advantage of the share sale to top up my present holding. But if, in the meantime, the price suffers a temporary setback, I might be tempted to dive in early.

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Malcolm owns shares in Lloyds Banking Group and Royal Mail. The Motley Fool UK has no interest in any of the shares mentioned in this email.