There are a few reasons why I thinkLloyds(LSE: LLOY) will likely underperform the FTSE 100 and other stocks in the banking sector for a good while.
Firstly, based on the value of its core tangible assets, at 78p a share where it currently trades, Lloyds is overpriced by about 30%.
Secondly, the UK government will continue to trim its stake, and I think that any additional placing will have to be executed at a steeper discount than the one associated to the latest placing, which has fetched the Treasury half a billion pounds in recent weeks.
Thirdly, investors should not be particularly upbeatabout a dividend per share of 1p, although most analysts are incredibly bullish about the banks dividend policy.
The UK government said this week that it had sold 1% of Lloyds stock, thus reducing its stake to23.9% from 24.9%.
I am delighted to announce today that the trading plan I launched in December has raised a further 500m for the taxpayer so far, Britains Chancellor of the ExchequerGeorge Osbornesaid on Monday.
While Mr Osborne is delighted to have sold Lloyds shares slightly above the average price the government paid for when it rescued Lloyds, investors should not be impressed.
Take the banks performance so far in 2015. Since January 1, Lloyds has underperformed the FTSE 100 by three percentage points and Barclays by five percentage points.Scandal-hit HSBC and Standard Chartered have done worse (not much worse, though), while Royal Bank of Scotland has recorded a similar performance.
Also consider that if you had added Lloyds to your portfolio one month after the stock market rally started in March 2009, youd have recorded a capital gain very close to zero. It may not be too much different in the next five years. If more cyclical stocks roar back which is very likely, in my view youd be better off betting on the FTSE 100 than on Lloyds.
Treasury Overhang: 1% for 500m
Morgan Stanley was hired at the end of 2014 to sell the shares through a pre-arranged trading plan, which hasnt been particularly successful, in my opinion. But what does the future hold?
Thats hard to say, but Lloyds shares are pretty expensive, based on aprice to tangible book value well above 1x, so downside is likely.Treasury sold a 1% stake for 500m, which values the total equity of Lloyds at 50bn, for an implied 9% discount to the banks current market value. If the same divestment plan is implemented in future, Lloyds paper will continue to flood the market, and Lloyds stock will be under pressure for a very long time.
Just for how long, though? Give or take, if every sale amounts to a 1% stake, three years or so. It could be worse, however.One very risky strategy for the UK government would be to sell a larger chunk of equity say up to 8% each time but then Lloyds would have to offer a steeper discount to investors, which is not ideal.
Finally, as far as the payout is concerned, if you think thata dividend at 1p a share is going to signal that Lloyds is on the right path, then you may even be ready to record zero capital gains into 2020, so go for it
But if you are on the hunt for value, and — just like me — you think that Lloyds is not a solid medium-term investment, you must consider afew low-riskcompanies outside the banking sector that are likely to deliver hefty returns this year and next!
Our latest FREE report includes some names thatoffer a dividend yield above that of the FTSE 100! Check out the companies included in the list of our top ten “multi baggers” thathave recorded a performance north of 20%in recent weeks: theyare a valid alternative to Lloyds and the other banks’ stocks.
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