Should I Buy Bank Shares?

By William Mills

The shares of the big banks were under the spotlight last week with the publication of 2013 results for both Barclays and Lloyds. In a series of articles we will look at some of the information which goes into deciding whether or not to buy or sell shares.

Lloyds Banking Group

A year ago Lloyds languished at 46p and pundits hailed them as ‘un-investable.’ Since then they rushed up peaking at 86p before falling back to around 80p.

The share sallied forth on vague promises of hoping to resume dividend payments in the near future. Dividends on ordinary shares were stopped some years ago and need the authorities’ approval before they can be resumed again. But even if permission was granted, are Lloyds in any position to afford them?

Under the Companies Acts it is not permitted to borrow to pay dividends. These must be paid out from either current profits or retained earnings. Lloyds 2013 Accounts have it still making a 1.2p loss per share on its 71 billion issued shares and its Balance Sheet shows retained earnings have dropped to £4 billion or 5.6p per share.

So if Lloyds paid a 4% dividend on its current price of 80p at 3.2p per share it would cost £2.27 billion wiping out over half of its retained earnings.

In contrast rivals HSBC and Barclays have very different numbers.

HSBC with 19 billion shares in issue has retained earnings of £75 billion,or £3.95 per share from which to pay dividends .

Barclays 16 billion shares have £33 billion in their retained earnings pot equalling £2.06 per share.

At the moment HSBC are paying a 4.5% dividend on its current share price, and Barclays just over 2%. With virtually no retained earnings to rely on Lloyds should not only wait until it is firmly in profit but also give itself time to build up its reserves before paying a dividend.

Having let the press speculate that a dividend payment is imminent Lloyds’ management might find themselves in a further fix if they paid a tiny amount which would then be compared with the pay outs of its rivals forcing its own share price down.

The creative accountancy path is full of potholes too. If large chucks of the business are sold with an arbitrary allocation of costs resulting in a capital gain then of course the profit would be recorded in the Profit and Loss Account and available for distribution. But in doing so they may artificially create a tax liability as well.

Still if it gets the shareholders a dividend and the directors a bonus?