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A ‘secret’ dividend and growth banking stock I’d buy over Barclays plc

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I like the look of Paragon Banking Group (LSE: PAG), which updated the market with its full-year results today. The numbers look good with underlying profit up 1% and basic earnings per share lifting 6.4%.

The directors pushed up the dividend by a little over 16% underlining the firm’s attractions as an income investment. Today’s share price around 472p throws up a forward dividend yield around 3.4% for the trading year to September 2018. Not bad, but the firm is committed to giving more back to investors, saying it reduced the dividend cover ratio of 3 to 2.75 for 2017 and expects to reduce cover down to 2.5 for 2018.

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An emerging force

As a bank, Paragon is not embroiled in legacy issues or engaged in trying to turn its business around like old-guard firms such as Barclays (LSE: BARC). Growth in earnings at Paragon looks ‘clean’ whereas Barclays looks like it’s struggling to regain lost ground after a few years of earnings reversals.

Paragon reckons it has spent the last few years in transition from “a monoline centralised lender to an increasingly diversified banking group.” During the year to September, the directors reorganised the structure so that most operational activities moved to its banking subsidiary, Paragon Bank, following authorisation from the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA). The company changed its name to Paragon Banking Group in September 2017 to become an emerging force on the banking scene in Britain, so I reckon ‘right now’ is a good time to look more closely at the stock.

City analysts following the firm predict that earnings will grow 11% for the year to September 2018 as the firm targets the needs of consumers and small/medium enterprises (SMEs) as a specialist lender in the UK market. The directors say that strong organic growth looks set to continue but that will be augmented by merger and acquisition (M&A) activity if opportunities arise.

As well as ensuring that strong capital and leverage ratios keep the business robust, the directors plan to bung around £50m into an ongoing share buy-back programme, which could end up enhancing returns for investors as long as the underlying business keeps growing. Meanwhile, we can pick up some of the shares on a forward price-to-earnings (P/E) ratio just below 10, which seems undemanding.

Barclays staggers to its feet

The firm shapes up well against Barclays. The five-year financial record shows mostly double-digit annual percentage increases in earnings, whereas Barclays posted big earnings reversals as often as advances over the same period. Meanwhile, Barclays’ forward dividend for 2018 will be lower than the firm paid out in 2012 – Paragon’s will be around 124% higher over a similar period.

Back in October, chief executive, James E Staley, said: “The third quarter of 2017 was particularly significant for Barclays as it was the first for many years in which we have not been in some state of restructuring.”  We could argue that now, then, is the perfect time to focus on the firm as it rises from the quagmire of its past. But why take the risk? Who knows what further problems may yet emerge from the banking goliath. I’d rather take my chances with the vibrant new upstart in town, so my attention is on Paragon.

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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended Barclays. 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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