A FTSE 250 gem with a 8.5% dividend forecast? Tell me more

Jon Smith talks through a FTSE 250 stock that pays out a generous level of income but could also offer him potential share price gains.

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Sometimes the worlds of growth and income collide. There are cases when I find a stock that pays out generous dividends as well as having share price growth potential. When having a look at some FTSE 250 income shares, I stumbled across this idea.

What the business does

The company in question is OSB Group (LSE:OSB). It’s a leading specialist mortgage lender, with over 2,000 employees around the UK and India.

OSB focuses on less traditional lending needs, such as Buy to Let, development finance, bridging and asset finance. The way it makes money by charging for the services it provides. Obviously, it has to carefully factor in the risk involved in the loans, to calculate what the fair rate of interest charged should be.

It also holds deposits for clients, allowing it to balance out money held versus money loaned.

In the latest quarterly report, underlying and statutory net loans were up by 7% versus the same period in 2022. Importantly, the three month plus arrears balances was only 1.3%, which isn’t problematic.

Income potential

The current dividend yield is 7.63%. This factors in the two dividends (excluding special dividends) of 21.8p and 10.2p from the past year.

I expect the next dividend to be declared next month, with the latest results. The forecast for this year is 22p and 11p, with 2025 expected to be 23.5p and 11.9p.

Should this be realised, then the dividend forecast for 2025 of 35.4p total could boost the current yield even further. Of course, I don’t know what the share price will be in 2025. This is a risk to my forecasts. Yet if I assume it stays at the same level, the dividend yield would rise to 8.48%.

The business has a current dividend cover ratio of 3, which shows to me that it’s generating plenty of money in order to be able to cover the current dividend payments. Only if the ratio slipped below 1 would I start to get concerned.

Share price benefits

The stock is down 25% over the past year. This reflects a steep fall from last summer with the H1 financial results. Statutory profit for the period fell by a whopping 73%.

However, this was mainly due to an adverse effective interest rate (EIR) adjustment that cost the business. If this charge is parked to one side, results weren’t that bad. Of course, the fact that such a negative adjustment had to be made reflects poor judgement in managing interest rate risk by the lender.

Yet I think that this mistake will be forgotten and the share price should recover in 2024. It wasn’t a fundamental problem that will impact the business again and again.

I’m expecting a much better performance to be revealed in the full-year results, so I’m considering buying the stock now.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jon Smith 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.

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