There were a big few days for International Personal Finance (LSE: IPF) last week. The IPF share price rocketed by over 30%.
Despite that, the shares are still 31% cheaper than they were a year ago. The price-to-earnings ratio remains in single-digits. So, is this a buying opportunity for my portfolio?
Why the IPF share price soared
What was behind last week’s price action? The company released its half-year results – and investors clearly liked them.
The business performance was actually mixed, in my view. Customer numbers only increased by 2.3% compared to the same period last year. Reported profit before tax shrank by 21.9%.
But the interim dividend was increased by over a fifth to 2.7p per share. Last year, the full-year dividend came in at 8p per share. So if the final dividend grows in line with the interim one, the total dividend per share for 2022 could come in at around 9.8p. Given that the IPF share price is currently around £1, that means the prospective dividend yield here is almost in double-digits. That sort of income opportunity certainly sounds attractive to me as an investor.
IPF business challenges
Does that make the shares attractive to me, though?
The dividend increase looks good, but if business does not stay strong, the dividend could always be cut again, as it was in 2019. The company’s revenues have fallen sharply over the past couple of years. In 2019, for example, they stood at £889m, but by last year they were down to £549m. The business suffered badly during the pandemic.
So do the latest results show that it is bouncing back? Revenue in the first half soared by 43.5%. But impairments grew far faster, rising 265% to £31m. However, that reflects an unusually low figure in the first half last year after money that had been set aside for possible impairments in the pandemic was released. Excluding that, the impairment rate in the first half was 7.5% compared to 6.5% last time round.
For a personal finance company, a worsening economic outlook could mean higher impairments as defaults rise. That is a key risk for IPF in the current environment. However, although impairments in the half rose, the increase was not so big as to shake the investment case, in my view.
The dividend yield here is certainly tasty and I think the sharp increase at the interim stage is a strong sign of management confidence in the business. The Chief Financial Officer has also been spending his own money on shares on multiple occasions over the past several months.
But it feels like a risky time to be running a personal finance business in markets like Poland and Mexico, as IPF does. If the global economy gets worse, defaults could rise. I think that could really hurt profitability at the company. Even after rallying last week, the yield on the current IPF share price still looks attractive to me. But given my concerns about the potential impact of economic slowdowns on future profits, I will not be investing.