The Government’s sale of £2bn of Lloyds shares has been welcomed by the industry as ideal for those using pension freedoms and first-time investors.
The Treasury announced today it would sell the shares to retail investors, offering a 5 per cent discount to investors, an additional bonus share for every ten shares bought and priority for those investing less than £100,000.
The move by the Treasury should pave the way for more companies to offer retail involvement in IPOs, says the Wealth Management Association.
“Wider share ownership creates stronger, more accountable organisations – a positive for the government and taxpayers alike,” says Liz Field, chief executive of the WMA. “This is great news for retail investors and whilst we await the detail, we would encourage other companies, particularly those with a retail focus, to give private investors the opportunity to participate in their share offerings.”
Lloyds is already the most popular share held by Hargreaves Lansdown customers who have taken their cash as a result of pension freedoms, says Laith Khalaf, senior analyst at Hargreaves Lansdown. This retail offering will attract “even more silver surfers”, he adds.
“High-profile public offerings like this one are also an effective way to get first-time investors to save for their future,” he adds, with the Royal Mail share sale in 2013 being the first investment for more than a quarter of those applying for shares.
The bank is also likely to become a solid dividend payer, offering investors a decent yield over gilts or cash accounts, says Khalaf. He expects the bank to yield 3.5 per cent this year and 5 per cent next year.
For investors who are investing £1,000, each investor would get £50 in price discount, £100 in share bonuses after a year and an expected £50 in dividends, he says. “Of course the dividend is not guaranteed, but that still looks like a pretty attractive package,” he says.
However, investors should be aware that share price growth is unlikely to appear, aside from the dividend.
“Growth is likely to be limited, as the UK is a mature and tightly regulated market, and cost-cutting can only take the bank so far,” says Russ Mould, investment director at AJ Bell.
“The bulk of any returns from the stock is therefore likely to come from its dividend yield and anyone looking to buy Lloyds therefore needs to be confident that analyst forecasts for a payout of around 3.9p per share in 2016 – equivalent to a yield of 5 per cent on the current share price – is both realistic and sustainable,” he says.
While smaller investors will be prioritised, Khalaf expects the share sale will be oversubscribed, meaning there could be some scaling back of the offer.