Are Lloyds Bank shares worth it?
Lloyds Bank shares to be offered at a big discount to investors. But should you buy?
The Government has confirmed that at least £2 billion of shares in Lloyds Banking Group will be sold to the public from next spring.
The good news for private investors is that the shares will be sold at a 5% discount to the market price. In addition, if you hand onto the shares for a year you will receive one bonus share for every 10 bought in the flotation, up to a maximum bonus of £200 per investor.
Should you buy Lloyds Bank shares?
For me, it's a firm yes, because of the attractive incentives on offer which help to turbo-charge investor returns.
Let's say, for example, that I buy £2,000 of shares in the float next spring. Assuming a 77p market price (the current price), these shares would cost 73.15p each. So my money would get me 2,734 shares. Selling these immediately (and ignoring transaction costs) would raise £2,105.18, for an instant profit of £105.18. This is a return on day one of a little over 5%.
However, holding the shares for a year is an even better option, as the free shares bonus gives me an extra 273 shares (£200 of shares at 77p each). Selling my entire holding after I get the free shares a year on – 3,007 in total – raises £2,315.39 (again, using a share price of 77p).
In this example, if I buy the shares and hold them for a year before selling them, I would make a return of 15.77%, which is well worth grabbing. If the share price rises above the float price, then this magnifies my returns yet further and boosts my profits even more. Likewise, any quarterly dividends paid following the float would be yet more icing on my investment cake.
Of course, with any investment it's important to remember that the price could easily go down, leaving you out of pocket. But for me this looks like an offer I couldn't refuse.
Open a Stocks & Shares ISA and enjoy tax-free returns from the stock market
Lloyds could pay tasty dividends
If you are happy to own bank shares as part of your investment portfolio, then hanging onto these Lloyds shares could be a smart move in the long term.
Lloyds' last two quarterly dividends (paid on 19 May and 28 September) were just 0.75p apiece, but the bank expects to ramp up its dividends over the next two to three years. A 3p yearly dividend equates to a dividend yield of nearly 3.9% at the current market price of 77p.
If Lloyds' yearly cash payout were to rise to, say, 5p a share, then its dividend yield would soar to nearly 6.5%, making it a high-yielding heavyweight in the FTSE 100 index. Such a high yield would make Lloyds a core holding for income-seeking investors, including fund managers.
Open a Stocks & Shares ISA and enjoy tax-free returns from the stock market
Must-read investing articles:
Most Recent
Comments
-
Don’t expect to make a quick profit by selling straight away (otherwise known as ‘Stagging’). Broker commission will take most of the 5%. Even in the first year, there is unlikely to be any profit because as soon as the price rises, the Treasury will sell some more shares which would bring the price down again. There is unlikely to be any significant price rise before the Treasury have sold nearly all of their remaining shares. Mike
REPORT This comment has been reported. -
Arblaster is right; it is an opportunity, but important not to get blown away with enthusiasm. 5% is not a 'big' discount, although any discount to NAV (not necessarily the same as share price) is worth having. Furthermore, applications for less than £1,000 worth of shares will be given priority, so you may not get more, even if you apply for them. Thirdly, it will not be easy for Lloyds to return to the good old days of healthy dividends, pre-crash. There is much more competition now, including, but by no means limited to that from Lloyds' spin-off, TSB (now part of Sabadell). Probably a good long-term investment, as part of a balanced portfolio (preferably inside an ISA), as Cliff says, but don't expect to make a fortune.
REPORT This comment has been reported. -
I can't give advice. What I can do is say what I will be doing. I intend to be taking part in this. I see it as an opportunity. However, things can happen between now and the flotation, and I may sink the money I am setting aside for Lloyds into something else.
REPORT This comment has been reported.
Do you want to comment on this article? You need to be signed in for this feature
07 October 2015