Provident Financial (LSE: PFG) hit the headlines for all the wrong reasons earlier this week. Its share price got shredded after the release of terrifying trading details on Tuesday, and fell almost 66% during the course of the session.
Market appetite for the sub-prime lender sprang back into life in Friday business as the shares jumped on the news that former company man Chris Gillespie had been appointed managing director of the battered Consumer Credit Division. But I think the stock could have much further to fall.
House of horrors
Investors were given a warning back in June when Provident Financial advised that its plan to replace self-employed agents with in-house operatives had spectacularly backfired. The move had caused “adverse collections performance” and “adverse sales penetration and customer retention” the firm advised and, as a result, profits from CCD would almost halve in 2017 to £65m from £120m a year earlier.
But a sudden and rapid deterioration since then forced the Bradford company to this week scale back even these shocking predictions. It now expects to punch a loss (excluding exceptional items) of between £80m and £120m for the full year and, as a consequence, it took the hatchet to the interim dividend. The lender added that any sort of payout in 2017 is looking unlikely.
Provident Financial said “a thorough and rapid review of home credit’s performance is underway to secure the turnaround of the business.” The catastrophic failure over at the consumer credit arm has also prompted chief executive Peter Crook to fall on his sword with immediate effect — the turnaround has now been left to executive chairman Manjit Wolstenholme to oversee.
There is clearly a lot of confusion surrounding just how and when Provident Financial will seize the wheel again. How long will it take to implement the necessary recovery measures, and at what cost? And how will upheaval in the boardroom affect the turnaround plan? No-one should be surprised if things get a lot worse before they get better.
Current City projections suggest the business will flip from a 15% earnings fall this year to a 21% advance next year. But predictions of a storming rebound looks risky business, certainly to me at least. And the prospect of prolonged earnings woe at Provident Financial makes it a hugely-unappealing pick despite its low forward P/E ratio of 6 times, in my opinion.
I would be far happier ploughing my hard-earned investment cash into flying ace International Consolidated Airlines Group (LSE: IAG) right now.
Unlike Provident Financial, IAG is expected to see the bottom-line swell in the short term and beyond, with City analysts forecasting growth of 3% and 9% in 2017 and 2018 respectively.
And these numbers are expected to support above-average dividend yields. This year a payout of 26.3 euro cents per share is anticipated, yielding 3.9%. And this figure moves to 4.3% for 2018, thanks to a predicted 29.2-cent reward.
With demand for the British Airways owner’s transatlantic and budget tickets continuing to boom, and the company benefitting from low fuel costs, I reckon investors can look forward to handsome earnings and dividend expansion in the years ahead.
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Royston Wild 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