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Questor: Lloyds faces its final PPI pain while Next shrugs off the high street blues
Questor Income Portfolio: another £550m hit for the bank takes the shine off profits but Next says its bottom line will now improve this year
Lloyds Banking Group’s performance for this portfolio can be summed up as “great for income, useless for capital gains”. The lender announced its interim results on Wednesday and by most measures the business performed well; the only blot was a much higher than expected provision for payment protection insurance (PPI) claims.
PPI has been the great self-inflicted wound for British banks in recent years and they must be counting the days until the claims deadline at the end of the month. But there was a last dose of pain for Lloyds, which said it was setting aside £550m for PPI redress over the period; analysts had expected just £56m.
The PPI bill contributed to a 7pc decline in Lloyds’ pre-tax profits, which were £2.9bn, compared with £3.1bn last time.
If we look forward to what a post-PPI world should be like, it’s a brighter picture. “Underlying” profits, which disregard the cost of claims and one or two other items, were just 1pc lower than last year at £4.2bn, while operating costs fell by 3pc to £3.9bn.
The “net interest margin”, the gap between what the bank charges for loans and pays to depositors, fell very slightly to 2.9 percentage points.
Better still, the interim dividend was raised by 5pc to 1.12p a share. One analyst predicted the same rate of growth at least until 2021, which would ultimately produce a yield of 7pc at today’s share price.
None of this prevented the shares from sliding by 5pc on Wednesday in response to the unexpected PPI bill and its effect on reported profits. However, there is a silver lining: as we have said before, a lower share price means Lloyds gets more bang for its buck when it buys back its own shares, as it has been doing on a daily basis.
Questor says: hold
Ticker: LLOY
Share price at close: 52.84p
Update: Next
The retailer continues to reward our faith in it: an upbeat trading update on Wednesday sent the shares 8pc higher to more than £60.
The most striking number to Questor’s eyes was the fall of just 4.2pc in sales from its physical shops in the 12 weeks to July 27, as analysts had predicted a decline of up to 10pc.
Overall, sales of Next-branded merchandise grew by 4pc, thanks to online growth of 12pc – almost three times the rate of decline in “offline” sales. At the time of Next’s previous trading update it had predicted a decline in own-brand sales.
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The company revised its profits forecast for the year to £725m, compared with £723m in the year to January. Previously it had expected a slight fall to £715m.
Analysts at Shore Capital, the broker, said: “Next has suggested that the retail division’s performance was aided by ‘self-help’ measures including better availability and a focus on stock management, which together with good seasonal ranges have helped the clothing retailer outperform the retail market.”
This illustrates the degree to which a company that operates in a troubled sector – and retail is certainly that at the moment – can still prosper if, as Next unquestionably is, it is well run and sticks to what it is good at. The stock remains a hold for the Income Portfolio.
Questor says: hold
Ticker: NXT
Share price at close: £60.54
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