Forget the Metro Bank share price! I’d buy this FTSE 250 dividend growth stock today

Roland Head explains why he’s avoiding Metro Bank plc (LON: MTRO) and buying a different FTSE 250 (INDEXFTSE: MCX) financial stock.

| 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.

The Metro Bank (LSE: MTRO) share price took another tumble this week, after the bank issued a dismal set of half-year results and said it would start looking for a new chairman to replace founder Vernon Hill.

However, despite recent problems, Metro’s figures appear to show that the bank is now profitable, growing and adequately capitalised. If that’s true, then the shares might soon find support.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

This view seems to be gaining strength with hedge fund investors who’ve previously been betting that the stock would fall. The percentage of the firm’s stock loaned out to short sellers has dropped from 12.5% in June to 5.2% today.

Indeed, forecasts produced by City analysts suggest that Metro Bank’s profits could bounce back next year, rising to a new record high.

Is it time to start buying this troubled challenger bank?

I’m still worried

News that savers have withdrawn £2bn from Metro Bank since the start of the year concerns me. This run of withdrawals has left Metro Bank with loans of £14,989m, but deposits of just £13,703m.

Although this is allowed, it’s not ideal. Metro Bank’s own target is for loans to be maintained at 85%-90% of deposits. When this ratio rises above 100%, it means the bank has loaned out more cash than its received in deposits.

Any rise in bad debts or a further run of withdrawals could leave the bank forced to raise cash from other lenders or even from shareholders. But in a situation like that, lenders might be wary about lending to Metro. That would push up the cost of any debt.

Metro Bank doesn’t expect its loan-to-deposit ratio to fall below 100% until at least 2020. I see this as an extra risk that’s likely to put further pressure on the bank’s profit margins.

Despite this, the shares are still trading on 19 times 2019 forecast earnings, and 16 times 2020 forecast earnings.

In my opinion, this suggests that MTRO stock is priced for strong growth and no further problems. That seems very optimistic to me. In my view, this remains a stock to avoid.

A financial stock I’ve bought

One financial stock I own myself that’s much more profitable than any UK bank is spread betting and CFD trading firm IG Group Holdings (LSE: IGG).

Since August last year, companies in this sector have been operating under new EU regulations which restrict the amount of leverage — or credit — they can offer retail customers.

However, these restrictions don’t apply to professional traders, who form a large part of IG’s customer base. To give an idea of how profitable these are, IG’s professional clients in the EU generated fee income for the business of nearly £27,000 each last year.

A very profitable business

IG’s latest results show that it generated an operating profit margin of 39% and a return on equity of 19% last year. Although earnings fell by 30% due to the new rules, chief executive June Felix is confident she can return the business to growth.

In the meantime, IG’s strong cash generation suggests to me that the dividend can be maintained. At 43p per share, this gives the stock a tempting yield of 7.5%.

This business will always carry the risk of being disrupted by new regulations. But in my view it’s the best of its kind and should be a good dividend growth buy at current levels.

More on Investing Articles

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

UK shares: 1 cheap dividend stock I bought to combat inflation!

This Fool is on the lookout for the best UK shares to protect himself from soaring inflation. Here is one…

Read more »

Smiling senior white man talking through telephone while using laptop at desk.
Investing Articles

A beaten-down penny stock to buy on the dip!

This penny stock is down 12% in just a few weeks. But at the current price, it looks like a…

Read more »

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

Should I buy Marks and Spencer shares for its growth in July?

Despite posting excellent annual results, Marks and Spencer shares are down 40% this year. Could this be a buying opportunity…

Read more »

Stack of one pound coins falling over
Investing Articles

The Lloyds dividend could keep growing – but will it?

Our writer explains why he's not taking the prospect of a growing Lloyds dividend for granted.

Read more »

Shot of an young Indian businesswoman sitting alone in the office at night and using a digital tablet
Investing Articles

Are BT shares a good buy at 185p?

BT shares offer a fairly attractive dividend and are down considerably over four years. But is this stock right for…

Read more »

An airplane on a runway
Investing Articles

The Rolls-Royce share price is down one-third. Should I buy?

The Rolls-Royce share price has lost a third of its value since the year began. Our writer explains why he…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

Down 57%, cheap NIO shares are ‘no-brainer’ additions to my portfolio!

NIO shares have risen considerably in recent months, but are down over the year. I'm still buying this stock for…

Read more »

Young woman with face mask using mobile phone and buying groceries in the supermarket during virus pandemic.
Investing Articles

Will a recession help or hurt the B&M share price?

The B&M share price has been tumbling and there's a recession looming, So why would our writer still consider adding…

Read more »