LLOYDS TSB has been off form for some time. Shares in the Black Horse have lagged behind the other runners in the banking sector by about 15 per cent this year, weighed down by fears over the dividend and the demands of its life assurance subsidiary, Scottish Widows.
Eric Daniels, the new trainer, has decided that drastic action is needed. He wants the bank to shed non-core businesses faster than a jockey loses pounds in a steam room. So the widespread interest in its New Zealand operation — Westpac, the Australian bank, applied for clearance to lodge an offer yesterday — is welcome.
The sale of the Antipodean business, although hardly significant in terms of earnings, would bring in plenty of capital. A disposal at $3.9 billion (£2.4 billion) would go some way to restoring Lloyds’s depleted balance sheet. Brokers estimate that the sale would boost its tier 1 ratio, the key measure of solvency, by two clear points to 8.5 per cent. This would make it one of the strongest banks in the UK.
Lloyds needs a more robust balance sheet for several reasons. The Basle II rules, due for implementation in 2005, will require banks to set aside more capital to support life assurance operations. Mr Daniels has made it clear that he wants to retain Scottish Widows.
Better finances would also ease the need for a dividend cut. Lloyds TSB, whose shares yield nearly 8 per cent, distributes more than 90 per cent of available profits, double the rate of its peers. Many shareholders, particularly the army of private investors, would like it to continue doing so.
The bank also has a large pension fund deficit to finance. Lloyds has already upped its contributions to help to close the £2.2 billion gap. If equity markets fail to rally sufficiently, the deficit may have to be recorded as a capital liability under new accounting standards.
More importantly, Lloyds TSB must improve its capital base if Mr Daniels’s ambitions are to be fulfilled. He wants to return to the bread and butter of banking: using capital to lend to individuals. If Lloyds is to catch up with HBOS, it must compete for business in mortgages and credit cards.
In the mortgage market, Lloyds has already begun to act more aggressively. During the first half, its share of the market doubled to 9.5 per cent, not far off its historical stock. However, it will take a while to see whether this strategy is working. In the meantime, Lloyds is unlikely to pull ahead of the pack. Hold.
Gold
THE World Gold Council is bent on tapping a new seam of investor with its plans to launch a fund on the London market. Gold Bullion plc, an exchange-traded fund, will give private investors the chance to trade in the precious metal as if it were a normal stock.
Modelled on an Australian fund floated in March, Gold Bullion will offer shares at one-tenth of the Troy ounce price. That is about £22 at today’s rates. The shares will be redeemable at any time for cash or gold. The bullion itself will be held in the vaults of HSBC. Investors will pay a monthly fee for costs and insurance that amounts to 0.24 per cent over a year.
Gold shone brightly last year, gaining 24 per cent as rattled investors sought safety from plunging equities. Some of its lustre has dimmed since then, with returns this year being a more modest 7 per cent. That is less than the FTSE 100 index has managed since the start of January.
The metal has long played an important role in investment as a refuge during difficult times. It has also attracted speculators. Both aspects have been important in pushing up prices over the past 18 months. However, it is clear that conditions have changed significantly since March. Much of the uncertainty hanging over markets has been dispelled, appetite for risk has improved and speculators have moved on, probably to platinum or oil.
The goldbugs argue that there are a mine of other reasons to buy the precious metal. At $360 per ounce, the price remains too low to justify further exploration and production. The US dollar’s devaluation will reinforce gold’s position as a store of value. They even assert that bullion is as useful a hedge against deflation as it proved for inflation in the 1970s.
Yet one should always be suspicious of a fund launched to private investors on the back of a strong set of short-term numbers — all too often it signals the peak. Perhaps this new fund will mark the end of the bull run in gold. Avoid.
Michael Page
AT ONE STAGE, it looked as if the staff at Michael Page, the executive recruitment company, would themselves be trawling through the situations vacant columns. A profit warning three months after its debut on the London market in early 2001 knocked the stuffing out of the stock, a pattern that was repeated several times as the company issued a series of downbeat trading statements.
The company’s prospects now appear far more promising, a fact not lost on investors. Michael Page currently trades on about 40 times this year’s forecast earnings, making these shares one of the most expensive punts in the market. After better than expected first-half results, the stock jumped 9 per cent yesterday and has doubled since mid-March.
Investors took heart from Michael Page’s declaration that the market for middle-management jobs had “stabilised”. Its own barometer of vacancies has ticked up to 14,300, after holding steady at between 13,500 and 13,700 for some time. For many shareholders, this was confirmation that the company is a late-cyclical play and should benefit from the recovery in corporate activity.
Given that Michael Page’s costs are broadly fixed, supporters of the stock argue that any improvement in trading will drop through directly to the bottom line. Staff, whose remuneration is largely through a salary, receive only 25 per cent of operating profits as a bonus. The company has resisted the temptation to cut numbers, so it is in a good position to exploit the upturn.
The shares may still be below the float price, but on a price/earnings ratio of 40, this is not the time to buy. Hold.
