Star fund manager Neil Woodford has invested in Lloyds Banking Group (LON:LLOY), returning banks to his portfolio for the first time in 14 years.
As the government prepares to sell the last of its stake in Lloyds “within days” following a successful turnaround, the fund manager’s Woodford Investment Management has bought back into the bank.
“The investment in Lloyds bank is a bit of a milestone seeing as Neil Woodford hasn’t held banks in his portfolio since 2003, aside from a very brief flirtation with HSBC in 2014,” said Laith Khalaf, senior analyst at Hargreaves Lansdown.
“Selling out of banks was one of the big calls Neil Woodford made which protected investors from the worst ravages of the financial crisis, and reaffirmed his reputation as an outstanding fund manager.”
In its latest Equity Income Fund update today, Woodford said the UK banking system has recovered since the 2008-09 financial crisis after rebuilding capital buffers.
The group has taken advantage of stocks that are “too cheap to ignore” following last year’s Brexit vote and that it was confident in the long-term outlook for the UK economy.
Woodford notes attractive dividends at Lloyds...
Its Brexit bargain hunting has also resulted in the company adding housebuilding and property stocks to its portfolio, including Barratt Developments plc (LON:BDEV), Taylor Wimpey plc (LON:TW) and British Land Company (LON:BLND).
“Specifically, we view Lloyds as a well-managed bank with a conservative approach to its balance sheet. Its valuation looks very attractive in our view, and it has the ability to pay a very healthy and growing level of dividend,” it said.
Lloyds raised its 2016 dividend by 13% to 2.55p and recommended a special dividend of 0.5p per share, adding that it expects ordinary dividends to increase "over the medium term" with a dividend pay-out ratio of at least 50% of sustainable earnings.
At Lloyds’ annual meeting yesterday, chief executive Antonio Horta-Osorio said the bank was in a strong position after being in crisis six years ago. The company impressed investors with a healthy set of first quarter profits in April and its highest full year pre-tax profit in a decade in February.
“Of the UK listed big banks, Lloyds has made the most progress, and now looks like a safe stable bank with the potential to pay investors a handsome level of dividends,” said Khalaf.
“We believe Lloyds is the most attractive banking stock in the Footsie. It has a lower risk profile than its peers, and a better grip on costs, while the huge costs of payment protection insurance (PPI_ compensation finally seem to be disappearing in the rear view mirror.”
Lloyds mis-selling scandals...
In March, the company said it had set aside a further £350mln in compensation for customers who were mis-sold PPI after the FCA announced it was extending its deadline for making new complaints, bringing its total charge to more than £17bn.
It now faces a £82mln hit for compensation to investors who were mis-sold investment products as “low-risk” that turned out to be complex and performed poorly. Lloyds issued an apology today, saying that it has written to 7,000 customers holding accounts with Lloyds and its investment arm, Scottish Widows, explaining the situation.
READ: Lloyds apologises over fresh mis-selling scandal and faces £80mln payment for compensation
Woodford completes disposal of GSK...
While Woodford remains positive on Lloyds, the fund has decided to back out of GlaxoSmithKline plc (LON:GSK). Neil Woodford said investing in the pharmaceutical company has been a “frustrating experience” with three out of its four divisions underperforming.
“Some investors remain hopeful of recovery but I am now less optimistic,” he said citing worries on competition for GSK’s HIV drug Triumeq, which is under the banner of its ViiV healthcare business. US biotech company Woodford’s main concern was that US biotech firm, Gilead, is currently conducting trials for a generic version of Triumeq.
“Over the past three years, ViiV has been responsible for more than half of Glaxo’s growth. If the company’s one remaining growth engine starts to falter, this could pose a threat to Glaxo’s future revenue growth, earnings and cash flows. “