27 October

The flurry of Lloyds Banking Group notes continues, and so it should. We need to break this share offer down and debate its merits, because many an inexperienced investor is being tempted by what might turn out to be a bad deal.

Whose ears would prick up at the offer of shares at a 5% discount, with small investors taking priority over the naughty institutions? Mine for one.  It sounds like a great deal. The Government is on our side this time, right? The only trouble is we have to wait until next March.

Think about it. Lloyds Banking Group shares are currently trading at 77p. What a bargain! Everyone’s been saying Lloyds shares are a bargain. When things are a bargain, people buy them. When people buy things, the price goes up. But now that the government has said you can get 5% off if you wait until next year, what will people do? I say they’ll buy the shares now anyway, because they’re smarter than that.

Lloyds Banking Group shares may well be cheaper now than they will be next March, even with the 5% discount, and especially given that the UK Index is around 500pts off those 24 August lows and arguably in recovery mode.

What if the market recovery continues? It looks like it might, since no-one’s that keen on charging interest for borrowed money right now (think China, India, the US, UK and Eurozone) and economic stimulus measures aren’t quite panning out like everyone hoped. That means….more stimulus. It’s a spenders’ market right now, not a savers’ one. When the markets hand you nuts, sure, squirrel them away somewhere or something. But if they hand you lemons, make lemonade for god’s sake!

So where do you think Lloyds shares will be in 6 months’ time? Not sure? I’m no market oracle (they don’t exist according to science), but the average 12-month target price of all the firms who follow Lloyds both closely and quantitatively is 91p.

Let’s be conservative and snip that down to 85p for safety, take away 5% and you have a price of around 81p. That’s 4p, or 5% more expensive than today’s price. If shares do hit 91p by next spring it’d be an even worse deal to sign up for the share offer now. Hindsight is a marvellous thing, but useless. Foresight is as rare as gold dust, but just possibly even more valuable.

Buy Lloyds shares today, and even if they go 1/3 of the way towards the average broker target price of 91p next March, you’ll be better off by 10%. They may get there sooner, or not at all of course, but this is a conversation that needs to be had. What do you think is more likely?

Don’t get me wrong, the Lloyds share offer may well be a good one. But it requires a certain set of conditions to be met. The question now is: will such conditions prevail? The problem I have is that virtually no-one believes they will, and what people believe to be the case matters in the financial markets. A lot. First time investors are reported to be flocking to the Lloyds share offer, but they should be wary of doing so. They might get a better deal right now, with no strings attached.

Augustin Eden, Research Analyst