Hobson: My Favourite UK Bank is...

THE WEEK: Morningstar columnist Rodney Hobson is unimpressed with Taylor Wimpey and reveals his favourite UK banking stock

Rodney Hobson 4 August, 2017 | 12:00PM
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If companies object to state intervention in how they conduct business, then they really must learn that grossly unfair sharp practice is unacceptable, even if they fall short of outright fraud. The banks have already discovered that their disgraceful behaviour rebounds at great cost in compensation as well as onerous regulation. Now housebuilders are facing the same lesson.

Taylor Wimpey (TW.) has set aside £130 million to cover the cost of its leasehold outrage. It sold houses leasehold with terms that were onerous but not obviously so, then sold the freehold on, so buyers were left at the mercy of unknown third parties. Anyone who was not taught multiplication tables at primary school – which pretty much includes two generations now – has little or no grasp of how rapidly doubling up ground rent produces massive annual sums.

TW has finally had to face the choice of compensating its victims or becoming known as a builder whose homes cannot be resold. It is not the first. The sooner the government makes good on its threat to outlaw the sale of homes on leasehold terms the better.

This was all a great pity, because otherwise the latest interims would have been added to the growing list of excellent figures and updates in the sector. With 9.3% more homes sold at prices 6.3% higher, TW saw profits surge by 24.2% in the six months to 2 July – or would have but for that compensation bill.

The second half has begun well with post-referendum nerves set aside, even in London where the brunt of any departure of foreign workers will be felt most.

Shareholders including myself have had their consciences bought off with a special dividend of 10.4p on top of the heavily increased interim of 2.3p. Let us hope that, unlike the banks, the housebuilders pulled off only one unacceptable stunt. On that basis, the sector should still be well represented in any investor’s portfolio.

Sin Stock Rewards Shareholders

My conscience still won’t run to buying into arms companies, but that’s my loss because shares in BAE Systems (BA.) have remained seriously undervalued all the time I have been investing in earnest. Those less squeamish have enjoyed an excellent yield over the years.

A change of chief executive shouldn’t stop that. Sales in the first six months of 2017 rose from £8.7 billion to nearly £9.7 billion and underlying profits from £849 million to £945 million. Orders have risen sharply. All the protests and protestations in the world don’t alter the fact that war is an unfortunate part of life.

The interim dividend is raised only a fraction from 8.6p to 8.8p but the shares are well down from their peak only five weeks ago and remain excellent value.

Banking Summary

With all first term reports in, it is time to assess the credit and debit columns of UK quoted banks.  I hold shares in my top two preferences, so I could be biased. My order of preference, best first, is:

Lloyds (LLOY): There could be a surge of PPI claims before the deadline but then that chapter will be mercifully over. Otherwise the shares have failed to reflect great progress and the removal of the government holding. Strong buy.

HSBC (HSBA): Profits are up across all regions and the outlook is good. I would have preferred a dividend increase to a share buyback. The shares are at a four-year high but it’s not too late to buy for the long term.

Barclays (BARC): Profits up despite a 25% fall in core division profits cause by one-off factors. PPI claims as per Lloyds. Dividend looks stuck at 3p for another year. Hold.

Standard Chartered (STAN): Despite increased profits, the update was rather uninspiring and there is no sign of a dividend. Avoid.

Royal Bank of Scotland (RBS): A welcome return to profit cannot hide the huge overhang of the government holding and heaven know when there will be a dividend. Sell.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.