Banking group Lloyds (LLOY) is launching a £1bn share buyback scheme. The news comes out of the blue but goes down well with investors, as do largely robust full year 2017 results and a 20% hike to the dividend.
Shares in Lloyds trade around 1.8% higher on Wednesday at 69.04p, although that's still roughly a fifth below 89p highs of 2015.
PLEASING PAYOUT
The dividend is important and the hefty increase in the annual payout will have gone down especially well with investors. Like most of the big banks, generous dividends are among the main reasons investors own the shares.
This is in stark contrast to competitor HSBC (HSBA) which yesterday announced that it would not increase its dividend.
ROBUST RESULTS
Lloyds also reported very decent results for the 12 months to 31 December 2017. The figures show an increase in statutory pre-tax profits to £5.3bn. That's good and bad. On the one hand this is 24% up on 2016 and the bank's highest since before the financial meltdown (2006), on the other, it also implies a £430m miss to consensus.
The results also demonstrate a balance sheet in increasingly rude health with a common equity tier one ratio (the buffer against economic shocks) increasing 0.5 percentage points to 14.1%. That's also ahead of 13.8% consensus estimates.
Lloyds is targeting a return on tangible equity of between 14% and 15% from 2019. As Joseph Dickerson, analyst at investment bank Jefferies says, the bank has ‘materially reassessed the earnings power of their business’.
OPERATIONAL IMPROVEMENTS
The bank also published its strategic update on Wednesday which is focused on making better use of digital technology to improve operational efficiency and the customer experience.
The £3bn investment into its digital strategy is at the heart of its ambitious return on equity and capital generation targets. It also hopes that by embracing technology it will bring operating costs down to below £8bn in 2020. This seems a realistic goal as Investec’s estimates that operating costs for 2018 will be just over £9bn.
Lloyds trades on 1.2-times Investec’s 2018 forecast price to net asset value.
