Broker tips: Lloyd's, Rio Tinto

Analysts at Morgan Stanley reiterated their 'overweight' stance and 60p target price for shares of Lloyds on Friday.

In a research note sent to clients following a meeting with the lender's chief, Antonio Horta-Osorio, MS said Lloyd's boss had struck a "realistic tone", talking him through a mix of organic and non-organic growth initiatives.

"Brexit is the obvious uncertainty, but reassurance was given around cost levers and management provided some sensitivity on provisions," analyst Alvaro Serrano added.

The lender's "severe" planning scenario envisaged a jump in the rate of unemployment to a peak of 8,6% and a 33.0% slide in house prices.

"Assuming a timely policy response, they think it would still be manageable resulting in a £2bn delta in provisions according to their models, which presumably would be absorbed by the removal of the counter-cyclical buffer," the analyst explained.

Regarding opportunities for non-organic growth, Serrano highlighted the purchase of Tesco bank as a good example and noted that management did not rule out other such purchases, having pointed out to him that Sainsbury's bank was contemplating a similar divestment.

Wealth Management and Insurance remained key, with management aiming to become a top-3 player in five years' time.

"Underlying market conditions continue to be challenging; however we see more resilient earnings than peers, and ultimately the Brexit outcome is likely to be the bigger valuation driver. We see Lloyds offering the best risk-reward."

Morgan Stanley estimated a target price for Lloyds shares of 85.0p.

Analysts at Jefferies upgraded mining giant Rio Tinto to 'buy' on Friday, stating the group's strong free-cash-flow through the cycle should lead to a supportive dividend in weak markets and leverage to the upside in stronger markets.

Jefferies noted that while iron ore prices could go lower, Rio shares can deliver strong returns over extended periods of commodity price weakness.

While Jefferies acknowledged that investors were concerned about downside risks to Rio Tinto's capital returns if iron ore price did fall, its analysis suggested the firm's FCF yield would be roughly 5% at a cyclical trough on its current share price, and its dividend yield would be in the 2.5%-5% range.

"In a world of low rates, a divi yield of >4% should support Rio shares in downturns, and downside risk to these shares should be limited from here," said Jefferies, which also issued the group with a 4,700p target price.

The analysts also added that seasonal demand strength and an easing of trade wars also skewed near-term risk/reward "to the upside".

While Jefferies estimates for 2019-20 were about 7% below consensus as it conservatively modelled volumes, costs and metals prices, the broker's estimates thereafter were more than 10% above consensus on higher iron ore price forecasts.

"We also think the market greatly underappreciates the importance of Rio's dividend as its shares effectively behave as a high-yield bond proxy with a growing coupon, and history shows that these shares have delivered spectacular returns even in bear markets for commodities," said Jefferies.

"We downgraded Rio on Aug 6 because of escalating trade wars, near-term seasonal demand factors, and our view that Rio was a consensus long. We upgrade today based on our detailed capital returns analysis"