Be grateful, dear retail investor, that George Osborne never got a chance to unleash his mass-market offer of shares in Lloyds Banking Group. The former chancellor had planned to sell discounted stock to the populace at 70p apiece, or thereabouts. Lloyds’ shares now fetch just 52.5p in non-discounted form.
The other side of the story, of course, is that Osborne did well to shift more than a few Lloyds shares to City institutions at prices that now look pretty only from the seller’s point of view. The reduction in the state’s stake from 43% in 2009 to 9% today was achieved at an average price of 79p. It is a rare of example of the City being a medium-term loser in a government sell-off.
In January, “market volatility” was blamed for the postponement of the Lloyds retail offer. Now, Brexit has surely delayed the spectacle for ages. Philip Hammond, Osborne’s successor, would be silly to attempt a revival at the current share price when he has a credible alternative strategy: do nothing.
Brexit has dented the idea that Lloyds would suddenly turn into a dividend gusher, which is why the share price has fallen by 23% since the referendum. The bank’s capital-generating capacity may have reduced by about a fifth owing to various technical tweaks, like adjustments to risk weights. Low interest rates, for even longer, won’t help profit margins. And, if the UK’s short-term growth prospects are weaker, so is Lloyds’ earnings potential: as the country’s biggest bank, it is a geared bet on the UK economy.
But some details of Lloyds’ tale are unaltered by Brexit. Disasters like provisions for PPI mis-selling are washing out of the system, which was the main reason why statutory pretax profits doubled to £2.45bn in the first half of the year. Meanwhile, chief executive António Horta-Osório can continue his attack on costs; another 3,000 posts are going. And, barring a serious crash in house prices, the mortgage book looks sound.
Add it all up and Lloyds should still be able to afford a dividend this year of 2.55p a share, or maybe a touch more. It’s just that a special dividend sweetener probably won’t happen. But 2.55p equates to a dividend yield of 4.8%. That’s not so bad. Hold the shares, Mr Hammond, if you want to signal confidence in the UK’s post-Brexit prospects.
Could Hinkley Point C yet be derailed?
EDF of France has taken the plunge and will sign the contract to build a nuclear power station at Hinkley Point in Somerset. But should you really approve an £18bn project on the basis of a 10-7 boardroom majority?
That slim margin does not generate confidence. EDF’s executives could not convince the workers’ representatives on the board to show solidarity. And, before the crucial meeting, a state-appointed director resigned, saying Hinkley was “very risky”. EDF’s last finance director did the same a few months ago.
It is still hard to believe this project will proceed, whatever is said about the decision being “final”. The UK has offered a contract to a company that looks fundamentally divided, is carrying a mountain of debt and is permanently at the call of a changing cast of French politicians.
Meanwhile, our own National Audit Office has rightly questioned the economics of Hinkley, which look grotesque for UK consumers. This would be the world’s most expensive power station, to be constructed to a design that is not even proven.
Events could still derail this absurd adventure. Let’s hope so.
Rolls-Royce revs up but there’s a way to go
A share to have bought on 24 June was Rolls-Royce: it’s up by almost a third since the referendum. Part of that bounce is mechanical. It’s great to have half your costs in the UK when you are selling engines for dollars. The other part, which yielded a 13.5% rise in the share price on Thursday, is about confidence in management.
Chief executive Warren East has clearly learned from his predecessors’ mistakes. When he arrived from ARM Holdings a year ago, he set expectations low. He grumbled about accounting “fog” and pleaded for time to unpick a top-heavy management structure. The City was half-braced for yet another profits warning.
In the event, yesterday’s half-year numbers delivered the reverse. A break-even position was on the cards but Rolls produced underlying pretax profits of £104m. That was still 80% lower than a year ago, but East now sounds vaguely cheerful. The target was to achieve cost savings of £150m to £200m by the end of next year. At the current rate of progress, it will happen sooner.
For his next trick, East may have to contain shareholders’ excitement. Some may already be dreaming of the day that Rolls matches arch-rival General Electric’s profit margins and boosts its annual profits by £1bn. It’s a nice ambition to pursue but, in a long-term business like engine manufacturing, progress is measured over decades.
