While I remain happy with my original appraisal of LLOY (the company didn’t go bankrupt!), the shares basically halved after I bought them and are now, some 16 months later, finally above my purchase price – just!

To put this perspective, this trade constitutes over 30% of my overall portfolio, and so it was something of a surprise to see the shares fall so aggressively.

However, it has also been a sound educational experience.

The fundamental reasons for owning the stock did not go away during this time. Simply, the market reacted, as is its wont, somewhat irrationally. As Keynes eloquently stated: “the market can remain irrational longer than you can remain solvent”. Then again, I employ no leverage in my portfolio, a loss would only have been realised if I had sold the shares.

In my opinion the fundamentals hadn’t changed for the worse, and a sale would have been a folly.

In the meantime, LLOY have come out with an interim management statement – a short summary of which is presented below along with my thoughts and a new guide sale price, assuming no new information comes along in the meantime (which it undoubtedly will).

The CEO, António Horta-Osório, says:

‘We have made further significant progress this quarter, improving underlying performance in a challenging environment, while continuing to deliver returns above the cost of equity in the core business and strengthen our already robust balance sheet. We have a strong commitment to helping Britain prosper, and our early participation in the Funding for Lending scheme is enabling us to extend further financing to businesses and customers in the UK. As part of this focus on supporting sustainable economic growth, we are continuing to increase SME lending on a net basis in a contracting market and provide mortgages to one in four first-time home buyers. We remain confident that, by delivering our strategy to be a simple, customer-focused UK retail and commercial bank, we can rebuild the trust of our customers and other stakeholders and can deliver sustainable returns for our shareholders over time.’

Summary points:

Underlying profit increased by 148 per cent to £1,904 million

Return on risk-weighted assets of 2.61 per cent (first nine months of 2011: 2.48 per cent) (VS comment: above cost of equity)

Strong capital position: core tier 1 ratio continues to improve and is now 11.5 per cent; total capital ratio increased to 16.6 per cent, confident we will meet future regulatory capital requirements

Full year 2012 Group net interest margin expected to be around 1.93 per cent, in line with previous guidance

Interestingly, there was no mention of a dividend anywhere in the report. Well, I clearly didn’t buy them on the strength of their yield (0%!) but it would be nice if there was a bit of noise in that direction. I’d rather be paid to hold shares than not.

My view is that the turn-around of the business continues broadly in line with management expectations. As a result I am happy to continue to hold. The market liked the announcement, and the shares have traded up steadily since the announcement (see chart above).

Without further visibility of future earnings and dividends I will still be looking to sell the shares at around the 60p level, but let’s see what happens in the meantime.

Cheers!

In summary, why do I think LLOY offers better value than RBS/other banks? Well perhaps it doesn’t, but with the UK government owning only half the interest in the shares compared with RBS (where the government owns >80% of the outstanding equity), IMO the chance of the value outing are significantly higher OVER A SHORTER TIMEFRAME. Therefore I think LLOY right now is the compelling choice in the sector. They also have the benefit of the new CEO which creates a bit of a good feeling in the market generally and he has a proven record on cost management, a key area where LLOY needs to improve.

As things stand my intention is to sell at a price over 60p when the ‘12F divi at 60p would be 3.3%, price to book would be around 1 – both of which would imply the value had been broadly outed for the time being. Obviously I would revisit in terms of any further news in the meantime.

My average purchase price is 44.44p, so looking for a tidy 35% turn, hopefully within 6 months. Will report back, hopefully with some good news as I close the trade, in due course.

Investors edgy as US stocks fall

Investors are concerned that financial markets will remain volatile.

US stock markets sank in early trade on fears the bailout of insurance giant AIG would not be enough to dispel the gloom engulfing the financial world.

AIG’s rescue and a potential takeover of UK lender HBOS had earlier boosted confidence in Asia and Europe.

But markets were volatile as nervous investors tried to make sense of the dramatic events that have unfolded in recent days.

The widely watched Dow Jones industrial average was down 1.9% at 10,849.

Top UK mortgage lender HBOS, which has faced heavy selling this week, fell as much as 50% before recovering after it emerged that it was in advanced talks to be taken over by Lloyds TSB.

HBOS shares were down 13% at 160 pence in London, the biggest faller in the FTSE 100, after being the top gainer at one point.

It has been a tumultuous week on financial markets, with significant changes in the financial landscape.

Key events on Wednesday included:

• Beleaguered HBOS in merger talks with Lloyds TSB after a steep fall in its share price
• US insurance giant AIG being bailed out by the US government
• Volatile stock markets as global investors remain nervous
• Trading on the Russian stock exchange being suspended
• Barclays snapping up key assets from Lehman Brothers after its bankruptcy

I don’t think anyone has got any or much confidence in market direction for more than a few days Darren Winder, Cazenove

The FTSE 100 index of top UK shares was down 0.48% at 5,001.4, reversing earlier gains, with some banking shares hard hit.

Shares in Barclays were up 9.8%, Lloyds TSB climbed 7.9% while Royal Bank of Scotland was down 2.6%.

Topsy-turvy trade

Trade is likely to remain rocky amid concern that financial system instability will continue after the dramatic events of the past few days.

“I don’t think anyone has got any or much confidence in market direction for more than a few days,” said Darren Winder, a strategist at Cazenove.

AIG’s bail-out follows the collapse of US investment bank Lehman Brothers, which caused share prices to plummet across the world’s financial markets.

Another investment bank, Merrill Lynch, has been sold off to Bank of America.

France’s Cac 40 share index was down 0.24%, while Germany’s Dax index was 0.64% lower, reversing earlier gains as Wall Street opened.

Russia’s stock exchange suspended trade following steep falls in shares.

Asian shares had a mixed session. Stocks in Tokyo, Taipei, and Seoul all rose, although prices in Hong Kong, Shanghai and Australia lost ground.

Japan’s Nikkei 225 index ended up 1.2% at 11,749.79, having risen by as much as 2.3% earlier in the day. The index had hit a three-year low on Tuesday.

Hong Kong’s Hang Seng index ended down 3.6% at 17,637.19 points.

This she did and for many years after, a dividend check would pop through our letter box every 6 months or so. Then my wife got the letter asking if she wanted to participate in the dividend re-investment plan. Which she duly did.

Now, 12 years later, we have nearly doubled the number of shares and every year the dividend goes up and up. We are nearly getting our original investment back every year, but of course we keep re-investing. The beauty of a DRIP is that you do not pay any transaction charges, so you get the maximum for your money.

I have now joined the DRIP scheme for our HBOS shares, and once again nearly doubles the number. These are even better as we were given then when Halifax de-mutualised.

I only wish I had discovered DRIP sooner and you could DRIP from within an ISA.

If you have any loose shares outside of an ISA, then look into DRIPing, if you don’t need the cash, then it is a great way of investing at low cost.

As ever

DYOR