With housing prices and major equity indices approaching record highs, the more cynical investors among us are probably already girding themselves for the inevitable downturn to follow. But, instead of traditional defensive shares such as consumer goods companies or utilities, could financials Experian (LSE: EXPN) and Provident Financial (LSE: PFG) be the best non-cyclical stocks out there?
The key to Experian’s ability to grow throughout the business cycle is its core operation of providing credit checks on consumers seeking mortgages, credit cards and any other form of lending. With records on some 900m consumers and over 100m businesses, Experian is one of the world’s largest credit bureaux. As we see in the below table, this scale means steady revenue growth even during the deepest of economic downturns.
|
|
Organic Revenue Growth y/y (%) |
Continuing EBIT growth y/y (%) |
|
2008 |
3 |
8 |
|
2009 |
3 |
8 |
|
2010 |
2 |
6 |
The business of providing credit checks is necessary even during recessions and involves vast moats to entry for competitors, so Experian’s ability to repeat this success during future crises is fairly certain. We’ve seen this in action over the past few years as its Brazilian business, one of its three main markets, has grown steadily on a constant currency basis despite that country’s deep recession.
While Brazil has been a drag on profits once Reals are converted into US Dollars, the increasingly wealthy country still holds huge long term potential. Other growth opportunities include the data analytics business, which takes advantage of Experian’s ability to sort through and find uses for massive amounts of data and sells this experience to an array of businesses. With shares trading at a reasonable 15 times full year EBITDA, I believe Experian is one of the most attractive non-cyclical shares to be found.
Sub prime
When the economy tanks and regular lenders such as high street banks begin bleeding red ink, sub prime lenders such as Provident Financial reap the rewards of consumers turning to door-to-door lending and other high interest forms of credit to pay the bills. This counter-cyclical business model proved valuable during the Financial Crisis as Provident performed well throughout the worst of the downturn.
|
|
Pre-tax profit growth y/y (%) |
Return on Equity (%) |
|
2008 |
11.8 |
46% |
|
2009 |
(2) |
45% |
|
2010 |
12.9 |
46% |
Provident thrives in good economic times as well as sub prime borrowers’ confidence rises and they turn to Provident for car loans and credit cards to buy more goods. Since 2011 adjusted pre-tax profits have increased over 85% through organic growth and smart acquisitions, showcasing Provident’s ability to grow throughout the business cycle.
And while other financial firms like banks are still struggling to pay sustained dividends, Provident shareholders have enjoyed a 74% jump in dividend payments over the past five years. Rising dividends are quite safe due to earnings that cover payouts 1.35 times and a well-managed balance sheet that has improved substantially since the crisis. With shares trading at 16 times forward earnings and analysts forecasting a 4.8% dividend yield for the year ahead, Provident is definitely at the top of my watch list.
