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Should you buy these overlooked Neil Woodford dividend stocks?

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Shares of business energy consultancy Utilitywise (LSE: UTW) fell by 10% this morning, despite the firm reporting an 11% rise in revenue for the first half of the year. Adjusted pre-tax profit rose by 4% to £9.4m and the interim dividend was increased by 5% to 2.3p.

These results look to be broadly in line with forecasts, so why have they disappointed the market?

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Is Woodford right?

Utilitywise has been criticised by some investors for its business model, which sees the firm book commission payments from energy suppliers as income a year or more before it receives the related cash payment. Some investors believe this is a risky way to do business, as there’s always a chance of non-payment.

To help address this criticism and improve cash flow, it has been accepting advance cash payments from energy suppliers. However, the group announced today that in order to maintain its impartial view of the market, it will stop taking cash advances. Net debt is expected to increase as a result and cash flow will worsen, at least temporarily.

On the other hand, it’s worth remembering that the companies who pay Utilitywise’s commissions are mostly big utility firms. These businesses have strong credit ratings and are unlikely to default on their obligations. For patient investors, this firm could prove to be a long-term cash machine.

That certainly seems to be the view held by Neil Woodford, whose funds own 29.16% of it. I suspect Mr Woodford would argue that the stock’s forecast P/E of 7.1 and prospective yield of 5% provide adequate protection against the risks involved.

I have to admit I can see both sides of this argument. Mr Woodford’s support for the stock may be proved right, but for now, I’m going to look elsewhere.

Growth plans could boost profits

Sub-prime lender Provident Financial (LSE: PFG) has underperformed the FTSE 100 over the last year. The group’s shares have climbed by just 3% compared to an 18% gain for the index. Provident is the sixth largest holding in Neil Woodford’s Equity Income Fund, so this flat performance may have held back the fund’s returns last year.

The main reason for Provident’s lacklustre performance is that earnings growth has been slowing. Earnings per share growth in 2017 is expected to be just 2.5%, down from 15% in 2016. In an effort to improve this performance, the group’s management announced some new growth targets today.

The group’s Vanquis Bank credit card business has increased its target from a customer base of 1.5m-1.8m with an average balance of £1,000 to 2m-2.3m with an average balance of between £1,000 and £1,100. Provident is also targeting unsecured lending and vehicle finance growth of about £800m across its various brands.

These plans have been cautiously received by the market and Provident’s share price has risen by just 1% today. In my view, the main risk is that by expanding too much, Provident may compromise its lending standards and see higher levels of bad debt.

However, the group has a good track record and the shares look reasonably valued, with a 2017 forecast P/E of 16.5 and an expected yield of 4.7%. I’d hold at current levels.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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