19 October 2015

A basic tenet of economics holds that a pound today is worth more than a pound tomorrow. This is down to your ability to purchase at a known price today versus risking paying more in the future. It is also based on being able to earn interest on that money immediately. The ‘time value of money’ is something we see every day, but give little thought to. And this got me crunching numbers on the government’s £2bn share sale in Lloyds next spring.

The deal looks great on paper with successful subscriptions for a £1,000 investment potentially being allocated shares at a 5% discount (£50 gain) and eligible for £50 dividends (5% consensus yield) and a 1-for-10 loyalty bonus if the shares are held for a year (max value £200). A return of up to £300/30% for a 12 month investment? Very attractive. Let’s go.

Not so fast. And this is the crunchy bit. The maximum loyalty bonus of £200 would require the shares to rise by 90% over the following 12 months. If they did so, the value of your investment would of course almost double too, generating total returns of 125%. Very nice. However, coming back down to earth, assuming the shares climbed a more reasonable 10%, returns would be a more realistic 33% while a static share price would mean gains of 21%. But this still assumes the share price doesn’t fall. If the price dipped 10%, come the following spring your overall return would still be positive to the tune of 9.5% with the discount, dividends and loyalty bonus offsetting the fall, however, anything worse than an 18 % share price fall and your overall return would go negative.

What I’m trying to say here is that, while the 5% discount and 5% dividend yield are almost certain, offering a 10% return, there is absolutely no way of knowing what the share price will be come loyalty bonus time. The shares may have doubled; they could have halved. And while the loyalty bonus will always boost the overall return, it will never be able to completely offset any big share price fall.

And this brings me to the magic 100p, with many making assumptions based on this share price (subliminal message within offer, with £1000 lots and 1-for-10 bonus?). If you are among them, this implies the shares rising 33% from the current 75p by next spring.

So I ask you, would you rather, A) wait until next spring to buy a maximum of £1,000 at 95p (5% discount applied), wait another year to pocket £50 dividends and a loyalty bonus of unknown value, whilst risking a share price fall denting the value of your investment? Or would you, B) like to benefit from immediate and increased exposure, buy more than £1,000 of those same shares right now, at a 25% discount (75p), with no restrictions on how long you can hold them for, still eligible for dividends and only needing front a 5% deposit.  If you’ve picked the latter, you might want to consider CFDs (Contracts for Difference) which can offer more cost effective investment options versus shares.

95% of brokers are bullish on Lloyds shares today with targets above the current share price (average 92p, 23% higher). Do you really want to wait for George’s offer next spring to find out the brokers were right and the shares trading 100p? Why not make the most of both opportunities? Whatever you do, allow Accendo Markets help you make the most from your investment and trading plans.

Mike van Dulken, Head of Research