Government completes Lloyds Bank exit

At last, after almost nine years, the government has sold its entire stake in Lloyds Banking Group, and made a £900 million profit for its trouble.

The historic moment came yesterday when UK Financial Investments (UKFI), set up by HM Treasury to offload its 43% stake, sold its remaining 638.4 million shares. At the day low of 69.4p it would have received £443 million.

"Lloyds Banking Group has been fully returned to private ownership," screamed the headline on the government's website, eight years and seven months after it bailed out the bank to the tune of £20.3 billion.

Selling down its holding began back in September 2013, and Lloyds, expected to complete its acquisition of the MBNA credit card business within weeks, now estimates it has returned £21.2 billion to the UK taxpayer. That includes £400 million in dividends, which Lloyds resumed paying again in 2014 after a six-year break.

Since it paid a final dividend for the 2014 financial year on 19 May 2015, Lloyds has returned a total of £5 billion, or 6.55p per share, to 2.5 million lucky shareholders. And it's fully expected to keep returning cash at a fair lick.

Ian Gordon, banks analyst at broker Investec, pencils in 4.5p for 2017, 5p next year and 5.5p the year after. After rallying over 2% Wednesday to a high of 71.84p, Lloyds currently offers a prospective yield of 6.3%, rising to 7% for 2018, then 7.7%.

"In practical terms, [the share sale] immediately removes the technical drag on the share price of government share sales of up to 15% of the average daily volume," explains Gordon.

"We do not anticipate any consequential change in strategy. Lloyds is already a "recovered" bank with significantly enhanced dividend-paying capacity. Let the good times roll!"

Lloyds shares have now surged by 37% since October, when UKFI told Morgan Stanley to start selling the government's final tranche of 6.5 billion shares. They're up over 52% since bottoming out at 47.1p in the aftermath of the Brexit vote, and sit at an 11-month high.

But Gordon thinks there's "further to go".

Consensus expectations for net interest margin (NIM), impairments and dividends have started to catch up to a "(pretty glorious) reality," he says. And, after the first-quarter profits beat announced last month, this upgrade cycle is "unfinished business".

Trading on 1.2 times tangible net asset value for return on equity of 10-11% through 2017-2019, and currently yielding 6.4%, Gordon rates Lloyds shares a 'buy' with 75p price target.

It's also worth looking back at our article last month An obstacle for Lloyds Bank despite stellar Q1 in which we referred to technical resistance at around 70p. We wrote:

"As the chart shows, 70p is the 50% Fibonacci retracement of the decline from 2015 high to post-referendum levels at around 50-51p. It has been a barrier to progress recently and there is further historical significance, with several touch points both as support and resistance over the past eight years. It will be interesting to watch whether that downtrend is confirmed as support."

Well, it was, and that's been a perfect platform for this rally, which currently looks to have legs.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.