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Does Lloyds’ share price present an investment opportunity amid pension row?

Lloyds Banking Group [LLOY] has been embroiled in PR misadventures over the last few weeks, but despite the controversy the company’s stock has remained relatively buoyant. 

The share price is up by 29.22% year-to-date and a further 31.72% on December’s year-long nadir of 50.03p. It currently trades around 65.90p.Lloyds 1-year share price performance, CMC Markets, 24 April 2019

 

Recent issues began when a staff union body called in to question the bank’s chief executive António Horta-Osório’s salary, which led to his generous pension scheme being cut by about £3,000 to £73,200 this year, a move that was denounced as an “obscene piece of symbolism”. 

Now, Lloyds’ COO Juan Colombas, who receives a pension allowance worth 25% of his £779,000 annual salary, might be forced to do the same after another alert was sent to shareholders from the trade body Investment Association.

Investors’ concerns over these handouts that are grossly out of line with the workforce’s pension pots have emerged as one of the leading issues heading into the UK’s annual general meetings next month. 

The Investment Association will review Lloyds’ arrangements over the next few weeks before its annual meeting on 16 May.  

 

Investment metrics remain robust 

Despite these headwinds, the bank’s hefty £46.8b in market value and relatively low price-to-earnings (P/E) ratio of 11.89, could make Lloyds one of the smarter investments in today’s market. 

The P/E ratio is in line with competitors such as Standard Life Aberdeen’s [SLA] 9.52, Bank of America’s [BCA] 11.16 and HSBC’s [HSBC] 13.98, and is much cheaper than Standard Chartered’s [STAN] 36.22.

36.22

Standard Chartered's P/E ratio

While there are broader issues of trust in the top echelons of the investment bank, the company’s stock’s beta rating is extremely low, 0.69, giving investors little unsystematic risk, or at least less risk than the wider market. 

What’s more is the opportunity Lloyds presents for consistent dividend income – shares offer a 5.06% forward annual dividend yield at a payout ratio of 56.73%. The company has grown its dividend by 13.33% over the last 12 months, according to Reuters.

As a result, the bank has remained a buy stock for most analysts, however the Bank of America Merrill Lynch did downgrade its rating from buy on April 18 on the basis that the stock was underperforming.

 

Market cap£46.36bn
PE ratio (TTM)11.89
EPS (TTM)5.50
Quarterly revenue growth (YoY)-9.40%

Lloyds stock vitals, Yahoo finance, 24 April 2019

 

In addition, a recent report by Deutsche Bank [DBK] set Lloyds’ share price target to 68p, with adjusted earnings per share (EPS) estimates for 2018 trimmed by 3% to £5.5bn, and by a further 6% in 2019 to £5.2bn, and another 4% in 2020 to £5.4bn.

The report says: “This is primarily driven by higher remediation cost assumptions, higher loan loss assumptions, and higher minority charges. Given lower earnings, lower PE multiple assumptions in our (sum of the parts valuation) and a higher cost of equity our target price falls from 77p to 68p. With 26% upside we retain our ‘buy’ rating. Each 1% higher cost of equity lowers our target price by 5p.”

While the stock is up 27% YTD, it’s a massive 90% off its all-time highs that were reached prior to the financial crash, making the stock a long-term play for investors. It was however up 2.74% last week, outperforming the benchmark FTSE 100 Index, which over the same period of time grew 2.44% to 7459.88p. 

 

Brexit headwinds persist

Lloyds has been subject to a steady force of macro headwinds, namely the uncertainty still surrounding Brexit, for some time now and given the companies strictly UK focus, it is more at risk than any other UK bank. 

Lloyds’ UK focus is perhaps best conveyed by the simple fact that, in their 2018 annual report, they did not provide analysis on non-UK activities due to a reduction in the group’s activities in other regions.  

The FTSE 100 group is scheduled to update investors on its first-quarter performance on 2 May, followed by the lender’s annual general meeting on 16 May.

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