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Stock market crash: what I’d do with Lloyds, IAG and Rolls Royce shares

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It’s almost exactly six months since the start of the worst stock market crash since 2008. Although some UK shares have recovered well, some haven’t. I think this is a good time to take a fresh look at some of these laggards.

Three of the biggest fallers in the FTSE 100 are Lloyds Banking Group (LSE: LLOY), Rolls-Royce Holdings (LSE: RR) and International Consolidated Airlines Group (LSE: IAG). Should we keep the faith, or is it time to move on? Here’s what I’d do.

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Lloyds: down but not out

The FTSE 100 is down by 20% so far this year, but the Lloyds share price has fallen by around 55%. So far, Lloyds has not made any recovery from March’s stock market crash.

Lloyds certainly faces some challenges, but I think this sell-off has probably gone too far. The UK’s biggest mortgage lender is in much better shape than it was 10 years ago, with lower costs and a stronger balance sheet.

As I explained recently, Lloyds is now one of the better performers in UK high street banking. Although losses from bad debts are expected to rise this year, my sums suggest that they should be manageable.

Lloyds’ shares now trade at a 50% discount to their book value, despite boasting a forecast dividend yield of 5.5% for 2021. If you’re seeking a long-term income, I think Lloyds could be worth buying.

IAG: stock market crash landing

British Airways owner IAG is another big casualty of the stock market crash. IAG’s share price is down by more than 65% in 2020.

The airline group reported an operating loss of €1.9bn for the six months to June, during which passenger numbers fell by 56% from 2019 levels. To try and stem its losses, IAG is retiring older aircraft and slashing passenger capacity. Management doesn’t expect demand to return to 2019 levels until 2023.

IAG CEO Willie Walsh has now decided that the group can’t safely continue without raising fresh cash from its shareholders. Mr Walsh is planning a jumbo-sized €2.75bn equity raise in the coming months. That’s equivalent to more than 50% of the group’s current market cap of £4.1bn (€4.6bn).

What this means for shareholders is that anyone who doesn’t invest new cash will face heavy dilution. Given the uncertain outlook for the group, I’d stay away until after IAG’s refinancing is complete.

Rolls-Royce: a tough decision

Without a return to long-haul flying, demand for Rolls’ flagship Trent jet engines will be limited — flying hours for the group’s engines fell by 53% during the first half of the year. But the story is more complex than that.

Even before the stock market crash, chief executive Warren East was struggling with a difficult turnaround. Changes made necessary by the pandemic have made Mr East’s job harder still. He now expects the firm to see a £4bn cash outflow this year and plans to cut 9,000 jobs by the end of 2022.

However, I still think Rolls has some attractions. Trading in the group’s defence business is stable. Rolls also has £8bn of cash and undrawn debt available, which the firm says is enough for at least 12 months. Up to £2bn of asset sales are planned to strengthen its finances.

I think that Rolls’ technology and its large share of the jet engine market mean that this business will recover. I’d continue to hold the stock at current levels.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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