I’d avoid this Neil Woodford 7% dividend stock and buy this 5%-yielder instead

Neil Woodford is backing a surprise takeover deal. But Roland Head sees better value elsewhere.

| 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.

Investors in former FTSE 100 doorstep lender Provident Financial (LSE: PFG) may be wondering if things can get any worse.

Their shares have fallen by 75% over the last two years, as the firm has struggled to recover from a botched restructuring and regulatory problems. A once-generous dividend has been cut by about 90%.

This sad story has now taken an unexpected twist. As I’ll explain, I think it might be time for shareholders to move on.

Woodford backs surprise takeover

Fund manager Neil Woodford owns 25% of Provident Financial. He also owns nearly 24% of the firm’s much smaller rival, Non-Standard Finance (LSE: NSF). This company was founded in 2014 by John van Kuffeler, who was previously Provident Financial’s chief executive.

NSF has been a disappointing investment so far. Since floating on the market in 2014, it’s reported losses every year. The firm’s shares have fallen by about 40%.

Woodford appears to think that Provident and NSF would do better if they pooled their resources. Along with his former employer Invesco, he’s backed a takeover offer by NSF for Provident Financial.

NSF has a market-cap of about £183m — it’s roughly 15% the size of Provident, at £1.3bn. So the deal will be an all-share affair. NSF is planning to issue Provident shareholders with 8.88 new NSF shares for each Provident share they own.

At the time of writing, the deal valued Provident stock at 532p, a premium of less than 5% to Thursday’s closing price. The deal already has the backing of Woodford, Invesco and another firm. Collectively, they control 50% of Provident shares, so this takeover seems almost certain to proceed.

My view

Provident’s recovery hit a stumbling block in January when it warned losses from bad debts would be worse than expected. The group’s turnaround was certainly taking longer than expected, but progress was being made. Analysts had pencilled in a 10% rise in earnings for 2019, and forecast a dividend yield of about 7%.

Van Kuffeler claims that Provident has “lost its way.” But, in my opinion, combining two under-performing companies is not generally a good way to create one good company. A complicated restructuring will now be required, along with several divestments.

In my view, there’s too much risk and complexity in this deal. I’d avoid NSF and Provident Financial.

This is what I’d buy instead

I don’t own every stock I write about favourably. But one stock I do own is sub-prime lender Morses Club (LSE: MCL). Woodford Funds also has a stake in this firm, but it’s only 9.3%. Woodford’s investors may wish that the fund manager had taken a larger stake in Morses Club’s flotation. Since floating in 2016, the firm’s shares have risen by about 45%, and paid a string of generous dividends.

The business took advantage of Provident’s problems in 2017 to increase its market share. Profit margins have improved too, and it generates a return on equity of about 25%.

The shares currently trade on 11 times 2019 forecast earnings, with an expected dividend yield of 5.1%. The business has very little debt and continues to look good value to me. I hold the shares and continue to rate them as a buy.

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.

Roland Head owns shares of Morses Club. 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

Investing Articles

Here’s how much I’d have if I’d bought 1,000 shares in this FTSE 100 defence stock 5 years ago

I could have made a pretty penny investing in this leading FTSE 100 defence stock. Now I’m looking at a…

Read more »

Investing Articles

1 potential millionaire-maker UK stock I’d like to buy for the long haul

For long-term investors, here’s 1 UK stock to consider buying right now with the potential to help power a growth…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

These cheap UK shares look way too good to ignore right now

With the UK stock market reaching new highs recently, this Fool plans to grab these two remaining cheap shares before…

Read more »

Young Woman Drives Car With Dog in Back Seat
Investing Articles

This unloved UK stock could rise 120%, according to a City broker

Some City analysts reckon a once-popular UK stock can recover from its massive recent decline and go on to more…

Read more »

Investing Articles

These FTSE dividend shares all offer 6%+ yields!

Paul Summers highlights three FTSE dividend shares that offer big yields. But is the passive income stream sufficient to offset…

Read more »

Young black colleagues high-fiving each other at work
Investing Articles

Is Legal & General Group one of the FTSE 100’s greatest value shares?

Legal & General shares boast low P/E ratios and massive dividend yields. Could they be one of the London stock…

Read more »

Front view photo of a woman using digital tablet in London
Investing Articles

I’m looking for the best FTSE 100 value stocks to buy now. Have I found them?

Barclays, NatWest, and Imperial Brands shares are recovering strongly. But these FTSE 100 stocks still trade on rock-bottom earnings multiples.

Read more »

Businesswoman analyses profitability of working company with digital virtual screen
Investing Articles

Where on earth will Nio stock be in 1 year?

Nio stock has demonstrated extraordinary volatility over the past 12 months, but where will it be in a year's time?…

Read more »