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.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young black colleagues high-fiving each other at work

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

More on Investing Articles

Investing Articles

Up 670% in 2 years! This former penny share is skyrocketing on SpaceX contracts

Shares of Filtronic (LON:FTC) were soaring to multi-year highs today after another contract win with SpaceX. Should I buy this…

Read more »

Investing Articles

Why is the Greatland Gold (GGP) share price up 10% today?

Our writer looks at the reasons why the Greatland Gold (GGP) share price is the AIM 100’s best performer today.

Read more »

Passive income text with pin graph chart on business table
Investing Articles

What do I need for a passive income of £100k a year?

How much would I need to invest to collect a very healthy yearly passive income on my retirement? Surprisingly, the…

Read more »

US Stock

£2k invested in Nvidia stock 2 years ago is now worth this boggling amount…

Jon Smith details how much unrealised profit an investor would have from buying Nvidia stock but is cautious about what…

Read more »

Investing Articles

2 value stocks that still look cheap despite the FTSE rally!

Harvey Jones picks out two UK value stocks that still look nicely priced even as the UK index climbs. He…

Read more »

Dividend Shares

I asked ChatGPT to build the perfect passive income portfolio and here’s the result

Jon Smith turns to the world of AI to try and find out whether ChatGPT could build an investor a…

Read more »

Investing Articles

£20,000 to invest? Here’s how the FTSE 100 could deliver a £2,040 passive income

Here are two ways that investors with a lump sum to spend could target a large passive income with FTSE…

Read more »

Runner standing at the starting point with 2025 year for starting in new year 2025 to achieve business planing and success concept.
Investing Articles

Here’s how someone could start investing in 2025 with just £1,000

Planning to start investing in 2025? This writer highlights two very different stocks that might be worth considering for a…

Read more »