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

Person holding magnifying glass over important document, reading the small print
Investing Articles

Do record revenues and profits mean investors should pay more attention to the Halma share price?

A P/E ratio of 37 might put some investors off the Halma share price without a second look. But impressive…

Read more »

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

As BAE Systems’ share price heads towards £14, is there any value left in it?

BAE Systems’ share price has soared since Russia invaded Ukraine, but it still looks very undervalued and has great growth…

Read more »

Bronze bull and bear figurines
Investing Articles

Which is the better bank buy right now: Lloyds shares or HSBC?

HSBC pays a much higher yield than Lloyds shares, has much more value left in its share price, and doesn't…

Read more »

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

At 231p, is there value in the Legal & General share price? Here’s what the charts say!

Here, this Fool delves deeper into Legal & General to see if its current share price is the bargain it…

Read more »

Investing Articles

3 diverse FTSE stocks I’d consider buying to invest in Asia

This trio of FTSE shares could be the perfect way to invest in the fast-growing economies of Asia over the…

Read more »

many happy international football fans watching tv
Investing Articles

6.4% yield! Is ITV a dividend stock to consider buying during the Euros?

Our writer takes a look at ITV and assesses whether the FTSE 250 dividend stock might be a good fit…

Read more »

Illustration of flames over a black background
Investing Articles

Up 915% in a decade! This growth monster may also be the best FTSE income stock of the lot

Harvey Jones has been watching this top FTSE 100 growth and income stock for months and now he's found another…

Read more »

Investing Articles

The tax-free route to millionaire portfolios

• Although annual ISA subscriptions are capped, ISAs are an undoubtedly serious wealth-building tool: you can build serious wealth.

Read more »