Election 2015: why a bet on Lloyds could be the best way to play it
Buying shares in Lloyds Bank could be one of the best pre-election investments you can make, says Adrian Sykes – regardless of the outcome on the big day.
I own shares in Lloyds, so apologies in advance for talking my book. But I want to explain here why I think buying shares in this partly-taxpayer owned bank could be one of the best pre-election investments you can make regardless of the outcome on the big day.
Lloyds is set to report an excellent set of first quarter results about a week ahead of the general election. It may also remind shareholders that it now has one of the strongest balance sheets of any large bank in the world (with Tier 1 capital of well over 12%); that, unlike all the other UK majors, it is free of foreign activities soon to be put through another stress test by the Bank of England; and that it has no investment bank to speak of. In short, it is an undiluted play on the rapidly recovering domestic UK economy.
Furthermore, due to a crass decision by the government to sit on the share price by dribbling out 5% of its residual shareholding through Morgan Stanley (since December, 3% has been sold, but without these sales the share price would be 85p-plus), it is at least 50% undervalued. Dividends have been restarted, and the shares sell on a 2016 price/earnings ratio of eight to ten (depending on which earnings estimates you pay attention to).
Now of course, there is the worry of Ed Miliband taking power. As an investor, the unpleasant prospect of a Labour 'coalition' government being led by the nose by the SNP is something I've given a lot of thought to. Luckily however, Alex Salmond was an economist with RBS, and the name Bank of Scotland' (owned by LLoyds) speaks to the pride of the Scots in their ancient banking institutions. So whatever pre-election threats Miliband makes about banking reform, they will prove to be empty. Lloyds is now the good boy on the patch, and the UK needs all the lending it can get.
More important, and much more likely, would be Lloyds' future under another Tory-led coalition. The government has promised full disposal of its 22% holding before the end of the year, and so will cease to have any influence on the share price. With profits growing to £10bn a year, paying out decent dividends, and closing the book on mis-selling reparations, I reckon that Lloyds' share price could reach 140p in 2016, becoming the third or fourth UK business by stock market valuation in the process (some of its bonds still yield 7% too).
My contention is that, whatever the outcome on 7 May, Lloyds offers wonderful value. Bear in mind that banks really make money when interest rates go up one day that will happen too.
On a good day for the polls, the share price will go through 80p, but don't chase them the government still has 2% to sell under its silly programme so on a bad day they will drift down to 78p, which would be a good time to pick them up.