MIDAS SHARE TIPS: With bad old days behind it, Lloyds is a solid income play
Antonio Horta-Osorio forked out £36,000 buying 50,000 shares in Lloyds Banking Group, after the Government sold its remaining stake last month.
Horta-Osorio is a wealthy man – having received about £40million in cash and bonuses since taking the helm in 2011 – but the move was heralded as a sign of confidence in Lloyds’ future, so should less well-heeled investors follow suit?
There is little doubt that the Lloyds of today is a very different beast from the toxic organisation that Horta-Osorio inherited six years ago. It has been streamlined, simplified and is now considered a solid, back-to-basics bank, focused on UK retail and business customers.
Efficient: The bank has made concerted efforts to change its culture
The group has the largest branch network and digital bank in Britain, with a 25 per cent share of the current account market, 22 per cent of retail deposits and more than 20 per cent of mortgages.
It is also taking over credit card giant MBNA, which will leave it with more than a quarter of the UK credit card market.
The payment protection insurance scandal, which has already cost Lloyds more than £17billion, rumbles on but the end is in sight. The bank now prides itself on helping customers to prosper rather than selling them products they do not need.
Costs have been reduced dramatically, the bank is making plenty of money and it is paying generous dividends.
In 2016, underlying profits were £7.8billion, though bad debts, restructuring, PPI charges and other bad behaviour penalties took that figure down to £4.2billion. Looking ahead, these costs should steadily reduce as Lloyds puts the bad old days behind it.
Analysts forecast underlying profits of £8.2billion for this year, rising to £8.4billion in 2018. The growth is not stellar – but it should certainly be enough for Lloyds to pay some really decent dividends, with at least 4.5p expected for this year, rising to 5p or more in 2018.
That puts Lloyds shares on a 6.4 per cent yield, one of the highest in the FTSE 100 index. For that reason alone, Lloyds is an attractive stock for income seekers, provided the bank manages to retain a conservative approach to lending and does not find itself engulfed in a new mis-selling scandal.
Concerted efforts to change the culture would suggest that the chances of a fresh scandal are slim. And the bank has plenty of scope to continue making money, as it becomes more efficient and reduces costs further.
There are risks, not least because the economic outlook is so uncertain. Are consumers borrowing too much? Is the consumer credit market heading for a fall? It is possible. The question is: do you believe in the UK economy and its growth? If you do, these shares are a buy.
Midas verdict: With bank and building society savings rates virtually non-existent, investors are almost certainly better off buying Lloyds shares than taking out one of their savings products. At 69¼p, the price should rise, provided there are no dreadful economic shocks down the line. In the meantime, the dividend yield makes this an obvious stock for investors in search of income.
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