Should you buy shares in Lloyds?

Updated on 11 February 2014 | 8 Comments

In one of the largest flotations ever, the public will soon be able to buy shares in Lloyds Banking Group. Should you grab a few?

Lloyds Banking Group last week revealed that members of the public will be able to buy its shares later in 2014. This is sure to be one of the largest-ever flotations of a Government-held asset, raising billions for HM Treasury and the public purse.

The taxpayer's stake in Lloyds

As the result of a £20 billion Government bailout during the 2008 banking crisis, taxpayers acquired almost 40% of Lloyds.

UK Financial Investments (UKFI) - the body established to manage the state's banking stakes - held onto all of these shares until mid-September last year, when it sold a modest stake in Lloyds. At a price of 75p a share, this sale of 6% of the bank's shares raised more than £3.2 billion for taxpayers.

Today, the state still owns almost a third of Lloyds and, with Lloyds share price at 82p as I write, this stake is valued at a hefty £19 billion. Rather than sell off this stake purely to institutional investors (as it did last autumn), Chancellor George Osborne has decided to allow private investors to join in the second sale of Lloyds shares - which could happen as early as next month or April.

So, will Lloyds' reprivatisation deliver bumper profits to private investors (as happened with last year's float of Royal Mail), or will it turn out to a damp squib?

Lloyds bounces back

During the financial meltdown that followed the bankruptcy of US investment bank Lehman Brothers in mid-September 2008, Lloyds teetered on the very brink of collapse. Thankfully, more than five years on, the bank is in much better shape today than it has been for many years.

Even so, Lloyds is not without its problems. In particular, the bank has been forced to put aside vast sums to meet claims for mis-selling of the now-infamous payment protection insurance (PPI). Indeed, in its update last week Lloyds added another £1.8 billion to its PPI compensation reserves, bringing the total to date to a whopping £9.8 billion. This is the largest PPI provision made by any UK bank.

In addition, Lloyds has also been caught up in the scandal of British banks mis-selling interest-rate hedging products to small- and medium-sized businesses. In its latest results, the bank takes a further charge of £130 million towards compensating these customers, lifting the total so far to £530 million.

On the other hand, and in another sign that Lloyds is on the mend, it has concrete plans to resume paying dividends to its shareholders. Lloyds has made no cash payouts to its owners since the dark days of October 2008.

However, regulator the Prudential Regulatory Authority (PRA) has agreed to allow Lloyds to restart dividend payments in the second half of 2014. While these will start at a 'modest level', Lloyds' aim over time is to pay out half (50%) of its earnings in cash dividends to shareholders.

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The UK's largest privatisations

Whatever happens to the state's stake in Lloyds over the coming year, the public offering is sure to be one of the biggest on record. Here's a rundown of the biggest floats, three of which occurred during the privatisation boom of the mid- to late Eighties:







Up to £6 billion


British Gas


£5.4 billion

Water companies


£5.1 billion

British Telecom


£4 billion

Royal Mail


£3.3 billion

Should you buy shares when Lloyds floats?

As with all decisions to buy shares and other assets, the decision to buy a stake in Lloyds should be governed primarily by the sale price. Too high and the shares become unattractive; too low and they become a blowout bargain, causing a political backlash.

HM Government paid an average price of 73.6p per Lloyds share, so I can't imagine that these shares will be offered to the public at much below this break-even price. Otherwise, the coalition will face criticism for making a loss on one of the biggest-ever public-funded corporate bailouts.

Of course, if you're very confident about Lloyds and its future, then you can buy its shares in the open market today. On the other hand, the bank's share price has already leapt by more than 50% over the past 12 months, producing one of highest returns in the blue-chip FTSE 100 index of late. Given this market-beating gain, some analysts argue that Lloyds shares are already fully priced and therefore unlikely to go much higher in the short term.

As a result, selling shares at the current market price offers little or no incentive to private investors to climb aboard the flotation bandwagon. Therefore, I suspect that the Chancellor will provide the public with some form of incentive to buy into Lloyds. This may be through a discount from the prevailing share price (say, 10%) or by giving free shares (buy 10, get one free) to individuals buying shares through the public offering.

Lastly, Lloyds faces a few more bumps in the road ahead, largely due to regulatory pressure. Labour has already warned that Lloyds and other big banks could be forced to sell off branches in order to improve competition in British banking. Even worse for shareholders, the 'black horse' bank could be split into two separate banks so as to stimulate market competition.

Read this guide on the share tips of 2014

The figures: Lloyds' valuation

To help you to decide whether Lloyds shares are for you, here are the bank's core numbers used by investors to take a view on shares (taken from and other sources):

Market price


Market value

£58 billion

Underlying profit for 2013

£6.2 billion*

Forecast price-earnings ratio


Projected dividend for 2014


Projected dividend yield


* Underlying profit excludes exceptional items, such as PPI reserves

For the record, as an experienced investor, I don't find these numbers particularly attractive, so am not tempted to buy Lloyds shares at the current price. That said, a decent discount or incentive from George Osborne could lure me into buying, especially at a bargain-basement price!

What do you think? Will you be buying Lloyds shares when they are made available? Let us know your thoughts in the comments box below.

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