What next for Lloyds after Osborne delays share sale

Chancellor of the Exchequer George Osborne has surprised the markets by postponing the proposed sale of the Government’s final 9% stake in Lloyds, which had been slated for the spring.

The Chancellor cited market volatility, which has left Lloyds’ share price around the 65p mark at the time of writing, well below the Government’s average purchase price of almost 74p. 

Osborne will clearly be looking for a better deal for the Government, to maximise returns as best he can for the taxpayer, but he will also want the market environment to be good for retail investors.

The last thing anyone wants is to take advantage of the attractive terms of the offer, only for the share price to drop in value immediately afterwards.

This will be particularly relevant to people who registered their interest in the share sale with AJ Bell. So, what is the outlook for Lloyds shares?

Global trend

It is not just Lloyds’ share price that is struggling – all banks are floundering. Bank sector indices in the UK, Europe and USA are all trading at their 12-month lows:

 Source: Thomson Reuters Datastream

​NOTE: Past performance is not a guide to future performance and some investments need to be held for the long term.

This is possibly a reflection of the following 4 factors:

1. Growing concerns over the state of the global recovery, and whether we are sliding back toward a recession
2. The slow pace of interest rate increases, which is crimping banks’ profit margins
3. The choppy nature of financial markets, which may hit the earnings power of those institutions with investment banking exposure (Barclays in particular, though this is less of an issue for Lloyds)
4. The extent of any bank’s exposure to the oil industry, via the loans it has made to producers and explorers. This is already an issue in the US, where big banks like Bank of America, Wells Fargo, Citigroup and JP Morgan have all talked of higher provisions against loan losses and greater caution on their lending toward energy firms, although there are no indications yet of any such worries on this side of the Atlantic.

That said, long term investors may look at the recent retrenchment of the Lloyds share price as a buying opportunity. So let’s weigh up the investment case. 

Dividend dynamic

Lloyds operates in a fairly mature market, that is very competitive and pretty tightly regulated, especially when it comes to how much capital the bank has to keep on its balance sheet to try and protect itself from any future downturns. All of these features mean earnings growth is likely to be modest.

That means the bulk of future returns may have to come from dividends and the yield on the stock. The good news here is Lloyds reinitiated dividend payments in 2014 and has already made a 0.75p interim distribution in 2015. The analyst consensus is for a 3.7p payment in 2016, enough for a 5.7% yield on the current share price of 65p.

Higher dividend payments and a juicy potential yield will probably form the key planks of the investment case for Lloyds, whose influence over the FTSE 100 should not be underestimated.

Our research shows that the analyst consensus for 2016 has the Big Five banks – Barclays, HSBC, Lloyds, RBS and Standard Chartered – contributing 16% of the FTSE 100’s dividends during the year and 62% of aggregate dividend growth.

Lloyds on its own is forecast to deliver the single biggest dividend increase in 2016, accounting for 38% of UK cash dividend growth for the FTSE 100 in 2016.

So, much to think about for UK investors. The Chancellor has not set a new timeframe for the Lloyds share sale but investors do not need to wait until then to invest if they are confident in the Lloyds dividend story.

Russ Mould

AJ Bell Investment Director