One potential income stock I noticed has an unusually high dividend yield is Vanquis Banking Group (LSE: VANQ). Could buying the shares boost my passive income or should I avoid them? Let’s take a look at the recent performance of the share price as well as the impact of the economy right now to help me decide.
Subprime lending
Vanquis is what is known as a subprime lender. In simpler terms, it provides loans to people who have weaker credit scores and are seen as higher-risk customers.
Let’s start by taking a look at what’s happening with the Vanquis share price. As I write, the shares are trading for 107p. At this time last year, they were trading for 178p, which is a 39% drop over a 12-month period.
I am aware that many shares have fallen due to macroeconomic issues including soaring inflation and rising interest rates.
Opportunity or one to avoid?
Vanquis’ dividend yield of 14.5% is what brought my attention to it as a potential income stock. When such a high yield is on offer, I instantly think two things. Either the share price has dropped substantially or the business is performing so well and has such great future prospects that it is rewarding its shareholders. The first scenario is what’s happened here.
It is worth noting that with Vanquis shares falling, they do look dirt-cheap on a price-to-earnings ratio of just five.
Vanquis has had its fair share of issues in recent years. A mis-selling scandal in 2021 led to a change in operations, which now means the business has rebranded and focuses on consumers with higher credit scores.
There are signs that Vanquis may have turned the corner, in my opinion. Its latest results, a six-month report for the period ended 30 June 2023, released at the end of July, showed some signs of life but they were a mixed bag overall. Interest income grew by 5% due to higher use of credit cards and vehicle financing products.
I believe this current upturn in fortunes for Vanquis has been driven by the cost-of-living crisis, which has been created by rising interest rates and inflation. The bad news is rising rates have led to a lot more defaults on its products. This has led to an overall loss for the business in this period. For more context, Vanquis has had to write off £85.6m in the past 12 months, compared to £38.5m a year ago. However, it did declare a dividend of 5p per share.
An income stock I’m keeping on my watch list
I’ve decided against buying Vanquis shares for my holdings. The uncertainty of the economy, coupled with recent performance as well as historic issues have helped me make my decision.
From an income stock perspective, I believe Vanquis’s yield is misleading. The shares do look cheap, but I would only buy them if I believed there is a certainty for recovery. Overall, I believe there are better stocks out there for me and my holdings.
