A lesser-known British/South African investment bank has been steadily climbing the ranks of the FTSE 250. With a market-cap of £3.6bn, it’s now the fourth most valuable stock on the index — and it’s clear to see why.
Investec (LSE: INVP) has implemented an aggressive dividend policy following the pandemic, when it was forced to slash dividends by 50%. But since then, it’s been ramping up its shareholder payouts for five solid years, raising the full-year dividend from 13p to 36.5p — a massive 180% increase.
Naturally, this has caught the attention of income investors, helping to boost the stock price by 168.5% since 2021. Impressive growth. Yet despite it all, the company doesn’t appear overvalued. In fact, it sports a shockingly-low forward price-to-earnings (P/E) ratio of only 6.8.
Numbers like that don’t come along often, so I had to find out what’s going on. Surely, there’s a catch?
Promising forecasts
Investec isn’t a well-covered stock but I managed to find two analysts with 12-month targets between 675p and 790p. Between the two, that’s an average increase of 29.9% from today’s price.
Earnings are expected to rise from 82p per share to around 98p by 2028, with revenue expected to reach £2.42bn, up from £2.14bn.
But most critically, the dividend is forecast to reach 45p per share by 2028 — a meaty 24% increase. Even if the price forecasts don’t materialise, the dividend income alone would make the shares worth considering.
So what are the risks?
Fundamentally, the company looks in decent shape, with modest earnings growth expected and steady growth in loans and customer deposits. However, there are a couple of clear issues.
The motor finance probe from the FCA means Investec’s sitting on a £30m provision for potential redress (and the final amount could be higher). Interest‑rate pressure is another concern, as easier monetary policy has already started to squeeze net interest income and could contain margins if rates stay low or fall further.
So the key risks for investors are uncertainty around the motor finance redress, credit losses if the economy weakens, and the impact of lower interest rates on profitability.
None of that puts the business in crisis but it’s worth keeping an eye on — in particular, how the FCA ultimately settles the motor finance matter.
My verdict
It’s impossible to say what’s ‘the best’ value and income play in any market, but Investec certainly looks appealing. Unfortunatley, the risks it faces are largely out of its hands. But how it deals with the eventual outcomes will make all the difference.
In my opinion, it’s one of the most promising bank stocks in the UK right now — especially for those looking to boost their portfolio’s average yield.
But it’s not the only strong income stock to consider in today’s market. With prices falling, I’ve noticed several other FTSE shares that look attractively undervalued.
For example, fellow challenger bank OSB Group offers a decent 6.6 yield and P/E ratio of just 6.7. Meanwhile, financial comparison site MONY Group sports an 8% yield with a forward P/E of just 8.3.
Whatever you ultimately decide, remember — diversification’s key to reducing risk during these volatile times.
