Lloyds' Shares Are Worth Twice As Much

Published in Company Comment on 4 August 2011

The shares look to be a long-term bargain.

I'm going to stick my neck firmly on the chopping block and say that Lloyds Banking Group (LSE: LLOY) shares are worth roughly twice their current level.

Why? Well, on a combination of its balance sheet, rising earnings, re-introduced dividend and less fearful times.

The question is when, if ever, they'll reach that level, which for the record would be 75p at the time of writing. And if and when they do, what will people like me be saying they're worth at that point -- £1.50!?

Well, probably. Because that's the carrot and stick nature of financial shares. They look cheap for ages, then they get more expensive but actually look cheaper still on forward earnings.

So here's what you have to do: Buy today, wait 'til they double, sell half and let the rest do what they will. Simples!

Hurdles to be jumped

Unfortunately, there are one or two small hurdles that the black horse must negotiate first -- like sovereign debt defaults.

Lloyds could hardly have picked a worse day to announce its half-year results. The Centre for Economics and Business Research said yesterday that Italy is likely to default, but Spain may just avoid it. And what about Ireland, which is already doing its bit to punish Lloyds shareholders?

The weak UK economy and higher funding costs combined to hit Lloyds' margins. The bank reported a whopping headline loss for the first half, mainly due to a £3.2bn to cover payment protection insurance mis-selling.

The Irish debt crisis also saw Lloyd's international unit report a £2.1bn loss due to the risks of its Irish debt not being paid back. And net interest margins fell as the bank had to pay more for wholesale funding and to attract retail deposits.

On the upside, underlying pre-tax profit increased 36% to £1.34bn. And the CEO, Antonio Horta-Osorio, who took up his job in March, is broadly optimistic.

What next?

Apparently, the bank is "well positioned to realise the group's full potential over time, and to achieve strong, stable and sustainable returns for shareholders."

The boss called the overall performance "resilient," and said he's sticking to guidance given in June on this year's interest margins and revenue despite problems in the UK economy.

But we aren't seeing any returns for the foreseeable. On the touchy subject of reinstatement of the dividend, we're told it will be "as soon as the financial position of the Group and market conditions permit". 

Meanwhile, Lloyds' core tier 1 ratio (which provides protection against unexpected losses) stood at 10.1% (the higher it is, the safer the bank is deemed to be).

The brokers see consensus earnings per share of 5.2p in 2012. But the forecasts vary between 3p and 10p. And they do see the bank restarting dividend payments next year, with an average forecast of a 1.23p dividend.

Discerning Lloyds' long-term future value, though, isn't about its current performance, or even next year's. It's where they'll be five years from now that's interesting.


At the time of writing, the shares are down. What seems to have the market spooked is concern over sovereign debt exposure. But this is nothing new, and was already reflected in the share price for me.

The bank tells us "half of the overall positions of £6.4bn relate to structures where there are underlying assets securing the obligations". It also has minimal exposure to the sovereign risk of Belgium, Greece, Ireland, Italy, Portugal and Spain.

As Lloyds sells off its branches and slims down generally, it should become a leaner, fitter beast altogether. It says it is on track to create this future, with costs slightly down. It has received a number of approaches for the 632 branches it plans to sell and hopes to have a buyer by the end of the year.

It would be no great surprise to me to see a smaller Lloyds bringing in EPS of 15-20p or so a few years' hence and paying a third of that in dividends. If that happens, the shares will have much more than doubled, but they'll look cheaper than they do today.

What do you think of the shares right now? Sound off below...

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> David owns shares in Lloyds Banking Group.

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Fonaweb 04 Aug 2011 , 11:45am

Adding to that, I have followed Antonio Osorio for many years. He is a tremendous manager with two big pluses: he understands technology inside out and that was the foundation for Santander's successes. And he is a leader, not a follower - announcing massive insurance provisions first, forcing others to do the same - is a classic move. Expect LLOY to become a very proactive player.

tophernator 04 Aug 2011 , 1:14pm

LLOY worth twice it's current price. What a coincidence, I PAID twice the current price a few months ago. Good to know I didn't make a mistake after all.....

Jonesey12 04 Aug 2011 , 1:21pm

Great tip, David, you've convinced me!

And tophernator, that's a great and witty rejoinder.


ed1value 04 Aug 2011 , 1:21pm

Yes they may double from here but a sustained downturn would use up a big part of the tier 1 capital. Hopefully the new CEO has done the clearout! Watch for the price at which His options get set!! Time to buy
Cynical or what!!

Littleaston 04 Aug 2011 , 2:33pm

LLOY are the main shares I already own, in excess of 100,000 and getting larger, as well as RBS, a minor holding compared to LLOY.
I have followed the market down, buying at every opportunity possible, and again today.
I intend to trade with 50,000 shares, and keep the others for trading with as the market allows.
Tangible net assets are alone worth 58.5 pence per share alone.
A great buying opportunity, no doubt being shorted by the city boys.

Littleaston 04 Aug 2011 , 2:34pm

whoops, keep 50,000 for income, and the rest for trading with.

rzbrdbe 04 Aug 2011 , 2:35pm

Well I have never invested in a Bank because I cannot understand them.
LLOY is highly geared to the UK economy and especially the property market (commercial and residential). Partly due to the shocking commercial loan book acquired from HBOS. Currently the banks are forebearing (is that a word) on some of their loans
So, in order to value LLOY an investor has to know how much of the bank's loan book is in default, and how much will go into default in the future.
As an investor you have to protect yourself against unpleasant surprise. The unpleasant surprises on the horizon for UK banks are legion (even ignoring its sovereign debt exposure):

1) Sub par GDP growth for next 10 years
2) The squeeze on the UK consumer due to limited wage growth and rising prices potentially continuing for the next 10 years
3) retail sector defaults
4) The internet and move away from bricks and mortar as companies strive for cost saving
5) Deleveraging: the consumer and the government have to get their debt to sensible levels
6) the forebearance that banks have allowed will have to unwind

To conclude: unless someone can suggest a way to stimulate the very low demand UK economy, Bank shares are for speculators.

LetsGoa 04 Aug 2011 , 3:02pm

@rzbrdbe The whole stockmarket is for speculators, the financial crises has not been solved yet just made worse by are gutless, weak, in hook to their financial masters politicians.

billyboy121 04 Aug 2011 , 3:19pm

rzbrdb, whilst you say you don't know much about banks, I think your point about the bank's loan book is a valid one. The latest figures coming out re the Irish debt and the PPI misselling don't inspire with confidence that all of the credit crunch related downside has come out as yet.

jonasdad 04 Aug 2011 , 3:35pm

Whilst I agree with David that Lloyds could well double , they could equally well halve again first! The trouble with trying to value banks at present is that whilst all the bad news we know about is already in the price, there could still be a load of other bad news to come out in the future.
I like the new CEO's pro activeness in leading the field, and I am pretty sure that in 5 years time I'll be wishing I had some Lloyds shares in my portfolio but as a recent retiree I can't afford the risk so I'm going to sit on my hands but I may review if they fall much further.
In the meantime, I think I'll double up again on Rolls Royce, I think they are a real value share at less than 600

Afrosia 04 Aug 2011 , 3:47pm

@LetsGoa - If the politicians are puppets to the financiers then shouldn't we be investing in the banks? :-D

But seriously, I am very concerned that Mr Horta-Osorio owns such a pitiful value in shares (circa £50k, compared with Bob Diamond's £25m in BARC). Nevertheless, I am buying more LLOY.

shinygoldcar 04 Aug 2011 , 3:58pm

I think trying to value banks is really difficult. They are highly leveraged, and have assets that can change in value quickly (or rather, change in market value quickly). Has anyone here on the Fool actually analysed in depth what the banks' assets and liabilities actually are?
I haven't, and I'll admit I don't really know what is on the balance sheet of these banks. So not for me at the moment.

snoekie 04 Aug 2011 , 4:46pm

Well, I bought in at the beginning of the week and posting on another site I got a taunting response that they would fall to 20p (probably posted tongue in cheek).

Now that would be a tasty thought and I would pile in again, but I am also watching other financials, oh gee, which way to go?

DIYIncome 04 Aug 2011 , 6:18pm

Down 10% today. LLOY is for masochists.

thebarns 04 Aug 2011 , 7:02pm

I reckon there are less than a handful of LLoyds employees who know its value or even how to calculate its value.

Everyone else is taking an enormous punt.

ANuvver 05 Aug 2011 , 3:16am

I agree that Osario is a good man for the job. But:
a) heavy exposure to toxic debt
b) a history of more accounting horse shit than horse sense
c) a bloated cost base (see b)
d) the fact that the whole enterprise is close to half-owned by the government

If you reckon you've got another twenty years to wait, fill yer boots!

adcmelb 05 Aug 2011 , 9:30am

I've invested in LLOYDS twice in the 1/ The british government told the bank to write off some third world debt the shares crashed within 12-18 months time they were right back up there 2/ Lloyds merged with TSB and the shares crashed again because the "experts" it wouldn't work you guessed it they were wrong and UP went the share price again.
So my guess and YES I have put my money where my mouth is 1/ The new management is a lot more competent then the previous that created this mess. 2/ If the PPI write off is not taken into account then the bank is profitable. 3/ Minimum exposure to PIIGS remembering that the bank has already written off most its loans in Ireland the loan book is being run down. 4/ If you have a few years to wait then there will be profits to be made management has already stated around 3 years before the bank can stand on its own.

GrahamMiller0 05 Aug 2011 , 9:56am

You were saying?

Lloydsactionnow 05 Aug 2011 , 12:06pm

The previous management of LBG did not with respect create the mess.

It was the previous directors of LTSB led by Sir Victor Blank and CEO Eric Daniels and the fact that they merged the UK's only AAA rated bank with HBoS which was BUST.

HBoS has dragged Lloyds into the mess it is in and it is going to take a long time to "recover"; it will never though be what LTSB would have been without the burden of HBoS.

Do you know that just before the merger but after the announcement of the merger in September HBoS received emergency funding in complete secrecy from Bank of England of £25.4 bn and the US Fed of $11bn.....and we were not told about it but the deal was touted as being wonderful?

Many big bonuses, a few firings and a couple of resignations later Lloyds continues to suffer losses.

We will not be holding our breathe for the BIG RECOVERY....Lloyds is labouring under a heavy burden and will do so for a very long time!

fedupwithbanks 05 Aug 2011 , 12:50pm


Don't forget the heavy pressure from our previous inept PM (Golden balls Brown) and his Darling chancellor in this stitch up of Lloyds shareholders. Daniels and co weren't bothered, they still walked away with millions or our money.

Talk about inept Scottish politicians propping up inept Scottish financial institutions!? I hope we don't see the likes ever again.

ergojones50 05 Aug 2011 , 10:41pm

LLOY & RBS = penny shares - and should be treated as such.

Bankrupt companies that happened to be indispensable so now have fake finances. Full of debt and multiple unfathomable variables. There are easier ways to make money in the market.

Check these ones at the same time as the runners & riders at Haydock. They are debt vehicle tokens.

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