Provident Financial (LSE: PFG) held its interim dividend steady at 43.2p per share as adjusted pre-tax profits plummeted 22.6% to £115.3m in the six months to 30 June.
The sub-prime lender, which delivered a shock profit warning in June, said the slump in profits was primarily due to changes in the home credit operating model. The restructure involved replacing its 4,500 self-employed collection agents with an in-house team of full-time Customer Experience Managers. It was intended to better manage customer relationships, but had caused a significant deterioration in its collections and sales performance as Provident faced problems with recruitment and training.
As a result, home credit receivables ended the first half £18.3m lower than the same period last year, which led pre-tax profits for the division to fall 85.5% to £6.3m.
Isolated
On the bright side, the disruption had been isolated to its home credit business, as Provident’s other businesses continued to make steady progress in growing its customer base and expanding its loan book. Vanquis Bank, its credit card business, saw a 27% uplift in new customer bookings in the first half, while Moneybarn, its car finance division, recorded growth in new business volumes of 15%. This cushioned the impact to the group’s financial performance and demonstrates the resilience of its diversified business model.
Looking ahead, I reckon that Provident will eventually overcome the disruption to its home credit business. The rationale behind the changes to its operating model remains intact and management continues to be confident that it can deliver revenue and cost benefits in the long run.
Dividends
The stock has been a steady performer in the last few years, with dividends per share growing by an average annualised rate of 14.3% over the past five years. Although its recent shock profit warning has changed things, shares in Provident still trade at a very attractive yield of 6%.
Provident’s problems aren’t going to resolve themselves overnight, but the company has in place a strong management team with proven leadership. As such, I believe the stock would make an attractive turnaround play, although probably not a best pick for investors looking for reliably growing dividends. That’s because, although Provident has so far avoided a dividend cut, its dividend sustainability is under pressure from its near-term earnings weakness.
Better pick?
Segro (LSE: SGRO), a property investment and development company which focuses on warehousing and light industrial properties, may be a more reliable income pick.
Adjusted earnings per share increased by 3.2% in the six months to 30 June as a shortage of warehouse space drove strong like-for-like rental growth and a fall in its vacancy rate to 5.5%. Net asset value (NAV) climbed 5.4% to 504p a share.
This implies that the shares currently trade at a 3% premium to its NAV, which may seem pricey to many investors given that many REITs continue to trade at significant discounts. Nevertheless, I reckon the REIT could well be worth significantly more, given the combination of its sizeable development potential and the superior market conditions in the warehouse sector.
Following a 5% increase to its interim dividend to 5.25p per share, its shares yield an attractive 3.3%.
