FTSE 250 stocks typically, on average, offer better growth than the FTSE 100. But over the past five years, the two indexes have been running pretty much neck-and-neck. In the Covid-19 crash, the mid-cap index initially dipped further. But it’s come back, and both have performed similarly this year.
If you’re looking for potential recovery stocks, I reckon the FTSE 250 is home to many candidates. One of them is Provident Financial (LSE: PFG), whose share price spiked 20% on Wednesday morning. Provident offers loans to sub-prime borrowers, and is behind such brands as Vanquis Bank and Moneybarn.
In recent years, that business has been a horrible one for investors. Provident Financial shares plummeted during the 2020 stock market crash, but that’s been the least of its problems. Look back a bit, and the pandemic fall looks tiny compared to 2017’s share price collapse. Over five years, Provident shareholders have suffered an 89% loss.
But Provident’s 2020 share price performance took a turn for the better on Wednesday. The shares jumped 20%, as mentioned, during morning trading in response to first-half results. That leaves the Provident share price down 49% year-to-date, against a FTSE 250 fall of 20%. Not a blazing success, but it’s been worse.
Not as bad as feared
Things aren’t rosy yet, but they’re not as bad as expected, and I think we’re looking at the start of a FTSE 250 recovery. The company reported an adjusted pre-tax loss of £32.6m, compared to a profit of £80.4m for the same period last year. Prior to these figures, analysts were predicting a full-year loss of around £62m. So it all depends on how the second half goes. On that, chief executive Malcolm Le May said: “I am cautiously optimistic about the outlook for 2020 and beyond.”
The Vanquis Bank and Moneybarn brands both saw a profitable half, which is better than I’d expected. So I can see the full year turning out significantly better than current forecasts. To echo the firm’s improving sentiment, Mr Le May said that “financial and operational performance were better than expected, and therefore we have decided to repay all furlough support to the government.”
Dividends back soon?
Before its fall from grace, Provident Financial was among the FTSE 250’s most attractive dividend providers. Even the 2019 dividend (greatly reduced from earlier years) would yield 3.8% on the current share price. There’s no dividend coming back just yet, as the company is instead pursuing “the continued aim of preserving capital and supporting business stability.”
But we heard that “it remains the group’s intention to resume dividend payments to shareholders as soon as operational and financial conditions normalise.”
FTSE 250 outperformance
Perhaps ironically, the effect of the pandemic on low-income families is offering something positive for Provident. Mr Le May pointed out that “our market will grow due to the pandemic.”
I think Provident Financial could be one of the FTSE 250’s better performers over the next few years. And I’m talking of both share price growth and dividends.
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Alan Oscroft has no position in any of the shares 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.