Provident Financial faces a tough 2020 – but dividends could be on the horizon

Sub-prime lender Provident’s results spark hope it could return to paying a dividend next year.

A robust showing by car loans-to-home credit specialist Provident Financial (LSE:PFG) today raised hopes the former high-yielding stock will return to the dividend-paying ranks from next year.

Shares in the FTSE 250 index company soared 17% to 229p after interim results revealed that the impact of Covid-19 had not been as severe for the sub-prime lender first feared.

Provident still plunged to an adjusted loss of £32.6 million, but there were positives in the performance of the car loans division Moneybarn after a rebound in demand for used vehicles. The division also benefitted from the overall rate of customers still taking payment holidays being modest.

The uncertain outlook is also likely to make high street lenders more cautious about who they lend to, meaning there is an opportunity for Provident to pick up quality customers.

Provident's confidence was highlighted today when it said it had repaid the cash received from the government's furlough scheme for about 350 staff at the height of the pandemic.

This move will put the company in a stronger position to resume dividend payments, having saved £40 million in March by withdrawing the 16p a share previously awarded for 2019 trading. Prior to the pandemic, the stock had been tipped by broker Peel Hunt as one of the top income stocks for 2020 with a forecast dividend yield of 8%, rising to 9.4% in 2021.

• ii view: Paragon Banking takes Covid provisions and scraps dividend
• Dividends crash 22% in worst slump since 2009

Analysts at Shore Capital and Numis Securities both said today's results raised the possibility of a dividend for the 2021 financial year, with the latter forecasting a 2022 dividend yield of 8.6%.

Shore added that Provident's scale, diversification and its Vanquis banking licence put it in a strong position:

“We believe there remain significant opportunities for a well-funded and well-capitalised non-standard lender to grow in the aftermath of the Covid-crisis given a likely increase in the number of available customers along with a reduction in competition.”

The shares fell 57% so far this year prior to today's results, leaving the company trading on a multiple of just four times Shore's 2022 earnings forecasts. The broker sees a fair value in excess of 300p, while Numis today increased its price target from 423p to above 500p.

Despite this growing optimism, the City expects the rest of 2020 to be challenging. Provident’s loan book growth will act as a drag on impairments due to the need for upfront provisions under new accounting rules. Today's half-year figure for likely bad debts rose 44% to £240.3 million, prompting analysts to forecast a similar overall loss for the group in the second half.

However, Provident is well capitalised after its a capital buffer increased to 35.4% and it also reported £1.2 billion of excess liquidity at the end of June.

• The AIM stocks still paying – and growing – dividends
• Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)

Chief executive Malcolm Le May said the strong financial position meant Provident would be able to keep lending to customers, including to key workers.

He added:

“Provident Financial is a responsible lender to consumers whose needs are not well served by mainstream lenders and we aim to put people on a path to a better everyday life. Covid-19 has not, and will not, change this. There continue to be significant growth opportunities in our current markets.”

Vanquis Bank reported a much smaller profit of £11.8 million, but is still in a position to pay an interim dividend of £30 million to the group. The biggest plus in the results came from Moneybarn, which also remained profitable after staying open to new business during April.

At a time when many competitors stopped lending, this decision allowed it to improve market share and to drive up credit quality. Demand for used cars has since rebounded strongly, leading to July being a record month for the business despite tighter underwriting.

Payment holidays at Moneybarn peaked at 28% of customers during the crisis before reducing back to 3.5% by the end of July. The home credit business reported a loss of £37.6 million, but this was better than initially expected. Collections in July were running at more than 90% of pre-pandemic levels, with 80% of money being paid remotely rather than on the doorstep.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.