My Saturday musings, followed by the week’s links.
Anyone who doubts the power of mental belief only needed to witness England’s dire performance against Algeria in the World Cup last night to have their preconceptions tested.
In Rooney, Lampard, Gerrard, and Cole, England boasts players the equal of any in the world. The rest of the squad is rich in talent, too, even after all the injuries.
Yet England still doesn’t have a team.
There’s a good reason why Australians, Americans, New Zealanders and Canadians speak English. It’s not the winters in the UK that gets you dreaming about moving abroad – it’s the muffled summers, the endless cloud and the grey.
An Italian friend calls Britain ‘The Rock’. From a continental perspective, the UK is a lump of offshore stone, blasted by wind and waves and with all the weather you’d expect from that.
But moving abroad isn’t just about sun seeking. The world is smaller, interconnected, and globalised – yet with very different costs of living in its different corners. If you can earn (or a retire on) a UK income yet reside in a far-flung land, your money can go much further.
Moving abroad is an especially tempting idea for young people in the UK. Priced out of the UK property market and Internet-savvy, smart twenty-somethings who missed their chance with London property could instead try their luck in Lisbon, Bucharest, or Buenos Aires.
With final salary pension schemes closed to them, moving abroad to avoid taxes and invest hard in faster-growing markets has to be worth considering.
Older people with a decent freedom fund or a UK-based income stream are also moving abroad, too. Retiring Brits have been fleeing to Spain for two decades, but you see more adventurous expats in the US, where boatloads of baby boomers are taking their dollars and their love of good service to Central America and South East Asia.
Perhaps the hardest time of life to move abroad is middle-aged with kids. I’m not sure the upheaval is generally healthy for either generation.
Moving abroad appeals to me financially, but also in terms of the sheer experience of it.
Yet like so many I’ve been rather timid, and found excuses to put it off – that I’m the wrong age, or that I’ll move when I don’t need to work, or that I can’t move due to my father’s health.
The latter is partly true, but as I currently earn most of my money as a freelance and have recently become single and un-tethered again, I’m feeling it may be now-(ish) or never. Otherwise I’m likely to stumble into either a job or another lovely lady, and the window will pass.
Clearly, moving abroad is as much about your mentality as visas or new vistas.
As is obvious, I’m no expert on moving abroad and there’s a bewildering amount to research. It’s one thing to go on a gap year, but another to look to live as a citizen in a new country.
When I wrote up my rationale for investing in Lloyds shares, I mentioned how profitable vanilla banking products are today for the retail banks.
A good example is the new Lloyds 5.375% retail bond, which runs for five years until 2015, and which has seen huge demand.
The closing date for applications was today; it should be trading electronically via your broker by the start of next week. (Update: Now listed at my broker as LBG1).
Income – At par the new bond pays 5.375%, divided across two payments twice a year.
Maturity – The bond matures in September 2015, and is non-callable. You can hold the bond in an ISA for tax-free income, provided you buy it in the next three months while it still has five years to run.
Security – It’s a senior, unsecured note. It’s rated AA-. Given the UK owns 41% of this bank, I think it’s a secure investment.
Value versus gilts – Five year gilts are paying around 2.4%, so you’re getting 3% above the risk-free rate here for holding what’s not a very risky product. I’d say that’s relatively good value.
Value versus cash – Like with all corporate bonds, buying this Lloyds security does NOT grant you any protection under the FSA’s £50,000 compensation scheme. So-called savings bonds are protected, with the Nationwide currently paying 4.25% on its five-year saving bond. Arguably that’s much more attractive, giving bond prices fluctuate unlike savings and your money is safe in cash.
Should you buy this Lloyds bond? It depends on your circumstances. As with the similar RBS Royal Bond last year, I’d suggest cash savings are more attractive for most private investors. (Make sure you get an savings account with a break clause if you might need your money before 2015).
Where the Lloyds bond could come in handy is if you’ve got a stocks and shares ISA and you want to diversify away from equities.
Then again, you’d have to do it in the next couple of months – and I’d personally prefer to buy cheap UK shares!
This bond is another example of how Lloyds is sorting out its funding requirements. Indeed, it just issued a well-covered €500 million eight-year corporate bond. Lloyds is a strong bank with a big future, provided there’s no meltdown.
Important: This is not a recommendation to buy Lloyds shares. I’m just a private investor, storing and sharing notes for interest and entertainment. Read my disclaimer. Your core portfolio should be in passive funds.
I see Morgan Stanley downgraded Lloyds shares (Google Finance: LLOY), and set a price target of 50p.
In contrast, I’ve built up a position in the UK bank over the past two months, paying an average price of 59p.
Lloyds closed last night at 55p. The share price has been falling for weeks.
Sovereign debt crisis? Coalition bank bashing? Fund managers who’d rather admit to crabs than owning bank shares?
Who knows and who cares? I smell an opportunity to buy a cash cow of tomorrow on the cheap.
Let’s backtrack for a moment. Passive index funds beat most active share traders, but there are still at least four reasons to pick stocks:
I pick stocks with some of money for the first two reasons. Even after a decade it’s too early to tell if I can consistently beat the market, but I’m having fun trying.
With Lloyds though, the fourth reason – hedging – also plays a role.
Regular readers may recall I’ve long thought London property expensive and so have rented for several years. So far I’ve been wrong, with the dip in prices in 2009 quickly rebounding.
I therefore partly see my new holding of Lloyds shares as a consolation prize should I continue to be wrong:
With that explained, let’s look more closely at the case for Lloyds.
I haven’t done my usual summary of the share price and fundamentals like P/E, price to book, earnings and so forth for this write-up.
That’s because such figures are pretty meaningless for Lloyds shares. The situation is changing fast from a capital, regulatory and political standpoint, and also in terms of the value of its assets and the outlook for its earnings.
Instead, I’ll outline what I think will happen to Lloyds over the next 1-3 years, and what it will do to the share price.
This means taking an economic view, which is always risky.
This outlook is critical, because following the UK banking recapitalization and Lloyds’ withdrawal from the asset protection scheme (which prompted me to dump Lloyds for the second time in barely 12 months), the Government and the regulator insisted that Lloyds retain sufficient capital to be pretty much bombproof. Lloyds then raised £21 billion via a rights issue, and it has taken every opportunity to reduce liabilities and build up capital since then.
My main reason for thinking Lloyds is cheap today is that I am more confident than the consensus in the economic recovery, even domestically.
I am therefore more confident that Lloyds won’t need any more capital, and that it will soon be a money-printing machine rather than a money pit. (Note: by ‘soon’ I mean 1-3 years, not 1-3 months!)
I first came back to Lloyds looking for a highly-geared way to invest in commercial property. Most of Lloyds’ bad debts (acquired from the HBOS merger) have been in commercial property, so any stablisation ahead of schedule would lead to the shares re-rating.
This seemingly happened in late April, when the company said it had returned to profit in Q1 – sooner than anyone expected – largely because the flow of rising bad debts had been staunched.
So far so good. But on reading through the analysts’ reports and Lloyds’ own update, the company’s ability to throw off cash once the bad times were over really struck me.
Given that I expect a recovery quicker than almost anyone I read or talk to (i.e. I expect it this side of hell freezing over) that makes Lloyds very tempting.
One minor snag is the vast number of shares out there – 67 billion!
However, I think Lloyds will eventually have so much excess capital as a faster-than-expected recovery sees its marked down assets re-rated that it will be able to buy back lots of its own shares. (It may have to wait for EU permission to do so – I don’t expect anything until 2012).
Buying back billions of shares will go some way to driving up earnings per share and eventually the dividend.
The sheer scale of Lloyds’ business is staggering. Its dominance is even more extraordinary when you consider that we’re statistically more likely to divorce than change bank accounts.
True, it has been ordered to sell some 600 branches by the EU, and it will probably sell its Scottish Widows business when the market improves (which will reduce its core capital requirements further, in my view). But it will still be the nearest thing to a national banking utility the UK has ever seen.
And utility is a good word to use, because it explains why I think Lloyds will escape serious harm from Vince Cable’s banking fatwa.
The new Business Secretary is to spend a year looking for the tartan paint and a left-handed screwdriver at how to break up the banks, but the most he’s likely to establish is a case for hiving off investment banking from retail banking. That would affect the likes of Barclays and RBS, but it wouldn’t mean much for Lloyds.
A smaller fly in the ointment could be the £14 billion action being taken by former shareholders. I don’t expect it to succeed.
I have created a massive spreadsheet detailing every nuance of the Lloyds’ business activities. If a secretary orders extra flowers for a bank manager’s mistress, I capture it.
Only kidding! I’ve not worked out my own projections for Lloyds’ business. Banks are incredibly complicated, and there are various analysts who do this full time. I don’t claim to know better.
Rather, I’ve looked at the picture painted by analysts through the prism of my own economic optimism.
As a result, I sense Lloyds is racking up capital. By the time any new legislation comes in (the mooted Basel-III requirements) I wouldn’t be surprised if it has much more than it needs. Bullish estimates of T1 capital of 10.5% or more by the end of this year look achievable to me.
What about impairments? Last year the bank wrote down £24 billion in impairments. It hasn’t yet given figures for 2010 – only verbal guidance – but by the first quarter this had slowed sufficiently for the bank to report a profit. The bank says impairments have ‘passed the peak’.
When you consider Lloyds made a loss of £6.3 billion last year due to those £24 billion impairments, you get a flavor for what it could achieve when it stops kitchen-sinking the HBOS loan book.
When will that be? I think 2010 is still a bit of a crap shoot, given all the upheavals going on in the markets (most of which are hot air).
But for what it’s worth, the consensus among analysts is for the bank to earn about 0.9p per share for this full year, putting the shares on a P/E of around 60!
From next year though (the year to the end of 2011) things get interesting. The Office of Budget Responsibility reckons the UK will be growing at 2.6%; I would expect few bad debts and big writebacks in such a climate.
The median forecast of £5.8 billion in pre-tax profits and earnings per share of 6p for 2011 looks pretty doable to me, given my economic outlook. The Lloyds portion of the business alone was earning £4 billion in pre-tax profits in 2007, and it was a very conservatively run business (so no frothy profits) that faced a lot more competition (so it’s making more from each deal now).
I’d think along the lines of Merrill Lynch’s banking analyst, who expects earnings of 12p per share by 2012, and I wouldn’t be surprised by 8-10p in 2011.
The Lloyds share price will march up just as soon as investors buy that future. If we value Lloyds shares at 10x earnings, then that would imply a share price of 120p, or more than double today’s price, within a couple of years.
That’s almost twice the government’s entry price of 64p per share, incidentally. If Cameron has any sense, he’ll wait until the recovery is in full swing before unloading the shares. The UK taxpayer owns 41% of the company, or 27 billion shares. A £30 billion windfall from selling up at around 120p would make a nice dent in the UK’s public debt.
The big risk? That the economy turns bad, writedowns resume, and Lloyds is forced to raise yet more money while postponing future profits.
Otherwise I think it’s just a mater of when, not if, the Lloyds share price doubles.
Note: I take no responsibility for the accuracy of this post. Read my disclaimer.
