Why Provident Financial plc could be flashing a warning for 2018

Provident Financial plc (LON: PFG) could experience a difficult year.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The trading update released by Provident Financial (LSE: PFG) on Tuesday showed the lender’s outlook remains tough. Its performance in 2017 was relatively disappointing, and this sent its share price lower by as much as 10% on the day of release.

Looking ahead, it would be unsurprising for there to be more falls in its share price in the short run. Here’s why the stock could be one to avoid in the near term, at least.

Disappointing performance

Perhaps the most disappointing part of the update was the fact that its Consumer Credit Division is expected to report a pre-exceptional loss at the upper end of guidance provided in August 2017. It’s expected to lose £120m in 2017. But more worrying for investors is the fact that the expected rate of reconnection with customers — who had seen their relationship with the company adversely affected by the migration to the new operating model — was lower than anticipated.

This lower than expected rate of reconnection means that the turnaround potential of the home credit division may be lower than many investors had anticipated. In fact, it could mean that a proportion of previous customers are now lost, and that the division will have to rebuild at a much slower pace. This could mean that the financial performance is less impressive than previously forecast.

Investigations

In addition, Provident Financial remains under investigation by the FCA. It is co-operating with the regulator, but with two investigations ongoing, there could be further volatility in its share price. Investor sentiment could be held back while the investigations continue. Should their outcomes be negative to the business, it could lead to a fall in the value of the company. As such, it may be prudent to wait for further updates before buying the company – especially while it is still searching for a new management team.

Investment opportunity

While Provident Financial may be a stock to avoid at the present time, financial services sector peer St. James’s Place (LSE: STJ) could generate impressive share price performance. The wealth management company is expected to post a rise in its bottom line of 25% this year, followed by further growth of 19% next year. Despite this strong rate of growth, it trades on a price-to-earnings growth (PEG) ratio of just 1.1. This suggests that it may be undervalued in what remains a buoyant wider stock market.

St. James’s Place also offers a bright future from an income perspective. It’s expected to post a rise in dividends of 33% over the next two financial years. This means it could be yielding as much as 4.4% in 2019, which could boost investor interest in the stock. With the global economic outlook continuing to be generally positive, and investor sentiment remaining optimistic, the investment prospects for the stock could prove to be very impressive.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens has no position in any company 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.

More on Investing Articles

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Time to sell this FTSE 100 underperformer, says Goldman Sachs

Analysts at one investment bank have a ‘sell’ rating on FTSE 100 stock Diageo. But could a short-term weakness in…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Down 5%, Glencore’s share price looks a serious bargain to me now

Glencore’s share price looks undervalued to me, supported by strong earnings growth prospects and the potential resumption of extra shareholder…

Read more »

Young brown woman delighted with what she sees on her screen
Investing Articles

I’d invest £6,580 in this FTSE 250 REIT for £500 passive income

This FTSE 250 renewable energy enterprise is on track to become a Dividend Aristocrat! Here’s how I’d invest to earn…

Read more »

Investing Articles

Buying 1,000 of some dividend shares today unlocks £45 in weekly passive income!

These shares are among the biggest dividend payers in the FTSE 100. Should investors be buying them now to earn…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

If I’d put £5k in index funds 5 years ago, here’s what I’d have now

Investing in index funds is an excellent way to grow wealth with minimal effort. But how much money can investors…

Read more »

Investing Articles

10.2% yield! 1 of the top income stocks to buy in July?

A 10% yield's pretty rare, but this firm's been growing shareholder payouts for nine years! Does that make it one…

Read more »

Investing Articles

‘FTSE 100 to skyrocket to 10,000’! 1 cheap stock I’d buy before the surge

Analyst forecasts predict a massive surge for the FTSE 100 may be coming by April 2025! Should investors snap up…

Read more »

Investing Articles

My Taylor Wimpey share price prediction for the second half of 2024

Having underperformed the FTSE 100 from January to June, our writer reckons the Taylor Wimpey share price might enjoy a…

Read more »