When I’m considering buying a share, I like to think I understand it. So I can’t buy banking shares – I’ve no real idea of the value of the assets and liabilities on their balance sheets. I’m not sure many professional investors do either. That’s not stopping Lloyds’ shares roaring ahead. Everything seems to be going right for the group.
The payment protection insurance (PPI) mis-selling scandal is largely behind it; the government is propping up the housing market – and with it Lloyds’ mortgage book – with its Help to Buy scheme; Lloyds is promising dividends again and lots of analysts are looking to support the shares ahead of the government selling its stake. With all the stars aligned, Lloyds’ shares could keep on going up and I wouldn’t be surprised if they do.
But much of the good news is already in the price. The shares trade on 15.6 times 2013 earnings and 1.2 times book value, with analysts predicting a modest return on equity of 6.9%. If Lloyds paid out 70% of profits as dividends in 2015 (earnings per share forecast of 7.3p), it would have a yield of 6.8% based on the current price. That looks tempting, but the bank may have to fill its big pension hole first.
However, Lloyds is still heavily exposed to a British housing market, which is being artificially inflated by the government. This increases the long-term risks. Take a punt, but get out before the music stops.
Verdict: a speculative punt