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I think these FTSE 250 dividend stocks yielding 5% are going cheap

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Trading at a forward P/E of just 5.5 at the time of writing, shares in challenger bank OneSavings (LSE: OSB) are some of the cheapest in the whole FTSE 250. 

Usually, when a stock’s valuation drops to this level, it is a sign that something is wrong with the business, and the market is avoiding the company because it believes earnings are going to fall substantially.

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We can’t predict the future, so at this stage, it is impossible to tell if this is the case, but based on what we know today, OneSavings is still expanding. 

Results show growth

According to the bank’s interim earnings report for the six months ended 30 June, underlying profit before tax increased 6% in the first half of 2019 to £96.9m. Underlying basic earnings per share increased 5% to 29p.

Even though the lender’s net interest margin — the difference between what it pays out to depositors and receives from lenders — declined from 301 basis points (bps) to 278bps year-on-year, the group was able to report an increase in profitability thanks to net loan book growth of 10% “driven by 13% growth in organic originations with high demand across our core market segments.

Management doesn’t expect this trend to come to an end any time soon, even with Brexit on the horizon. “Despite ongoing uncertainty around Brexit,” the trading update notes, given the strong growth already achieved this year and the “current strong pipeline” of loan applications, the company expects to “deliver high-teens net loan book growth in 2019 at attractive margins.” 

Merger of equals

OneSavings’ management believes the company’s all-share merger with Charter Court Financial Services Group plc (LSE: CCFS), which received approval from shareholders at the end of July, will only bolster growth.

Charter and OneSavings both offer relatively similar credit products. They specialise in buy-to-let mortgages and specialist residential lending. Considering the growth in OneSavings’ loan book during the first half of 2019 looks as if the demand for these products is moving.

Charter also reported strong lending growth during the first half of the year. The company grew its loan book 23.8% to £7bn on originations of £1.5bn. Unfortunately, profits dipped slightly, from £93m to £83m for the six months ending 30 June, due to higher costs associated with the merger. 

Boost to growth 

While OneSavings’ takeover of its smaller rival still has to receive the green light from regulators, I think the deal will be an excellent outcome for shareholders of both businesses. By combining, the two challenger banks should be able to reduce operating costs, funding costs and improve efficiency, leading to overall increased profitability.

Right now, shares in both businesses are dealing at forward P/Es of less than six and support dividend yields of 5.2%. In my opinion, these multiples undervalue the companies and their prospects, and I would be quite happy to buy both of these FTSE 250 income stocks for my portfolio today.

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Rupert Hargreaves owns no stock 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.

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