It is important to diversify your portfolio sufficiently so as to minimize the impact of any one investment going south. Although Lloyds (LON:LLOY) is a share that is unlikely to be the next multi-bagger, it does present a solid offering and could be viewed as a relatively ‘safe’ share with the potential of decent returns, especially if you have exhausted your appetite for riskier shares.
Not too long ago, back in 2009, Lloyds Bank was acquired by the Government in the middle of the financial crisis. Over the next decade, the bank seriously re-invented itself and reformed its key businesses in order to become profitable again. After producing considerable profits for FY 2016, the government sold off its majority share and the bank was returned to private hands in 2017. The first annual results since its return to private hands was announced today.
Let’s look at some of the stats from today’s published full year results:
- Statutory PBT of £5.3 billion, underlying profit of £8.5 billion
- Announced FY dividend of £3.05 vs a share price of ~£70 – a 4.3% return
- Announced a share buyback programme of £1 billion – about 2% of the outstanding free float – Market cap of ~£50 billion
Profits at LLoyds have grown and are expected to rise further in 2018. Lloyds acquired the credit card issuer MBNA in early 2017, and 2018 will be the first year that a full year of revenue will be reflected in the results. In addition, Lloyds also announced the acquisition of the Zurich workplace pensions and savings business which will add to revenue numbers in 2018. It is important to note as well that the majority of Lloyds’s revenue is currently generated from the’ traditional’ bank – over 50% of revenue came from the retail arm and as such, should not be as vunerable to sudden market movements.
Not only is Lloyds steadily growing its revenue, but it’s also trying its best to minimize costs. The bank has maintained the £2,000 limit on cash bonuses for staff even though it’s now private. Its simplification programme is well on track, with savings of £1.4 billion versus an expected target of £1 billion in 2017. In addition, although the bank currently has the largest branch network in the UK, the bank is also seeking to slim down on its branches, and is investing in its digital platform. The bank is also already leading in this area, and has quoted themselves in today’s Annual Report as having the most number of digital users that other leading banks – 13.4 million active online users.
Of course, the banking sector is not without risk. Perpetual scandals and resultant fines have seriously affected the sector (e.g PPI, Libor scandal) and have depressed profits. In addition, there is much competition from various start up fintech companies – even the Amazon’s of this world are rumoured to be thinking about venturing into financial services.
Even with this in mind however, I believe that LLoyds is a relatively safe near to medium term investment and should generate at least 7% return over the next year. The share price seems a bit depressed to me, given that the current price is roughly the same price that it was when it was returned to private investors around a year ago! It appears that I’m not alone in this view, with analysts suggesting an average target price of 75p – an upside of 7% to the current share price.
As always though, please do your own research before buying/selling this share; the opinions above are only my personal views.
