3 reasons why I’d buy the Lloyds share price today

In February, I explained why I believe Lloyds Banking Group (LSE: LLOY) remains a dividend buy.

Today I want to go into a little more detail about this and look at three areas which attract me to this stock as an income investment.

1. The most profitable big bank?

One attraction of Lloyds is that its by far the most profitable of the big three UK high street banks.

The main measure used to judge profitability in banks is return on tangible equity, which compares after-tax profit with the banks net tangible asset value. Heres how these big three compared in 2018:

Bank	Return on Tangible Equity (RoTE)
Lloyds	11.7%
Royal Bank of Scotland	4.8%
Barclays	3.6%

I admit that performance is improving at Barclays and RBS. I expect both banks to report rising returns over the next couple of years and rate them as value buys. However, turnarounds dont always succeed. Investing in such situations carries some extra risk.

In contrast, Lloyds is already delivering the goods. The banks higher RoTE means that its now generating surplus capital. This is being used to fund shareholder returns.

2. Shareholder returns have doubled in four years

In 2015, Lloyds returned 2bn to shareholders through dividend payments. By 2018, this figure had doubled to about 4bn, made up of 2.3bn in dividends and 1.75bn of share buybacks.

What does this mean for shareholders? For the second year running, chief executive Antnio Horta-Osrio has opted to use some of the groups surplus cash to reduce its share count.

For shareholders, the benefit should be that earnings per share rise more quickly, because profits are split among fewer shares. Last years 1bn buyback repurchased 1.6bn shares. I estimate that this years 1.75bn buyback could involve about 2.65bn shares.

Given that the bank has about 71.2bn shares at the time of writing, this years buyback alone should reduce the total share count by about 3.7%. However, I think the real reduction will probably be a little lower than this.

Bankers bonuses: Lets use last years buyback as an example. Although the firm repurchased 1.6bn shares in 2018, its share count only fell by 0.8bn. One reason for this is probably that many of the shares repurchased were used to fund bankers bonuses.

Lloyds bonus pool for 2018 was 464.5m. Cash bonuses are capped at 2,000, with the remainder paid in shares. It seems fair to assume that the majority of the 2018 bonus pool will be paid in shares, purchased as part of this years buyback.

Indeed, my sums suggest that around one quarter of this years 1.75bn buyback may be used to fund last years bonuses.

In fairness, I think this kind of situation is fairly common at most major listed companies. I dont see this as a reason to avoid the shares. If Lloyds couldnt use repurchased shares for bonuses, it would have to issue new shares. This would dilute shareholders arguably a worse outcome.

3. An income buy

Overall, I think Lloyds still looks decent value at current levels. Its balance sheet looks strong and the shares look affordable to me, trading at about 1.2 times their tangible book value and offering a forecast dividend yield of 5.3%.

In my opinion, this could be a good starting point for an income investment. Id continue to buy Lloyds.