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Why Provident Financial plc’s woes could help you retire early

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Like it or not, it’s hard to question doorstep lending’s status as a lucrative and resilient business model. It is, after all, what allowed the now-beleaguered Provident Financial (LSE: PFG) to register a profit every single year since listing on the stock market back in 1962 and secure a spot in the market’s top tier.

In recent weeks however, the company’s star has fallen. Indeed, the sheer number and scale of Provident’s issues — two profit warnings in quick succession, the departure of its CEO, an exodus of workers, a probe by the Financial Conduct Authority and the cancellation of its dividend — lead me to suspect that any recovery in its fortunes will require a monumental dollop of patience from its remaining owners.

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For investors intent on bringing forward the age at which they can retire however, I think now represents a great opportunity to profit from Provident’s mismanagement through buying shares in one of its rivals. 

Better prospects

£200m cap Morses Club (LSE: MCL) is the UK’s second largest doorstep lender and likely to benefit hugely from Provident’s woes. Indeed, if last Thursday’s update is anything to go by, the latter’s shares could prove to be a great buy-and-hold investment.

Signposting its interim results in early October, the company announced that trading over H1 had “continued to be strong” with a total of £82.2m of credit issued — 25% more than over the same period in 2016. The number of customers also “increased substantially” to roughly 233,000 as a result of organic growth and territory builds. Progress on the latter has been ahead of management expectations with the firm also keen to stress that recent investment would not have an adverse effect on full-year earnings.

While CEO Paul Smith was understandably “delighted” with how Morses Club was performing, investors may also be comforted by his belief in the need to build new product streams “carefully over time” rather than through “quick-fire initiatives“. On this front, the development of its digital platform — which should allow it to offer a number of innovative services to customers — looks promising.

Trading on a still-rather-reasonable 13 times forecast earnings, the shares look a great buy, even taking into account the prospect of increased regulations being placed on those operating in the industry. They also come with a chunky 4.5% forecast dividend.

That said, this isn’t the only option available to investors. Peer Non-Standard Finance (LSE: NSF) is another attractive proposition. 

Like Morses Club, Non Standard is in the process of executing a high growth strategy with investment in new branches and an increase in the number of agents helping it to register a 26% increase in pre-tax profits during the first half. According to management, the recent acquisition of lender George Banco now means the company has a “leading position” in each of its business divisions.

While the shares are slightly more expensive to acquire than those of Morses Club, a valuation of 15 times forecast earnings isn’t exactly prohibitive. Dividend hunters may also wish to note the whopping 67% hike to the interim payout as an indication of just how confident management is in the full-year outlook. Analysts now expect the company’s shares to yield 3.9% in the current year — a rise of almost 150% on that returned to investors in 2016. 

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Paul Summers has no position in any of the share 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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