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Why I’d buy Neil Woodford favourite Provident Financial plc, along with this 5% yielder

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Provident Financial (LSE: PFG) suffered a torrid year in 2017, slumping to a pre-tax loss after a damning investigation by the Financial Conduct Authority (FCA).

It’s all down to a failure by the company to adequately inform customers of its Vanquis Bank subsidiary of the full cost of something called a Repayment Option Plan. The firm was fined £2m, but that was small change compared to the compensation it had to cough up to customers, which reached around £170m. 

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But with the FCA now happy, and a £330m rights issue getting the company back to the required levels of liquidity, Provident’s problems could now be well behind it. And we could be looking at a nice buying opportunity.

Major investor Neil Woodford seems to think so, having said he believes Provident is already on the road to recovery and that “the company’s intrinsic value is substantially higher than the current share price would suggest.”

Turning round

Full-year results lent support to that, with Provident claiming “a significant improvement in customer service and operational performance” since the action it took in its home credit business. Vanquis Bank also saw a rise in new customer bookings, so the fallout from last year’s problems appears limited.

No dividend was paid for 2017, but analysts see a 1.5% yield likely for the current year (with EPS expected to be flat). And if the firm manages the the 36% forecast rise in EPS for 2017, the dividend could be back to a tasty 5.4% yield by 2019. 

Some of that mooted recovery is already built in to the price, but forecasts would drop the 2019 P/E to around 12.5, and I see that as an attractive valuation.

Big yield

What better to accompany Provident Financial’s predicted return to strong dividends than a 5.3% yield paid now? 

That’s what life and pensions consolidator Chesnara (LSE: CSN) has just announced, as it once again kept its progressive dividend ticking along ahead of inflation. We saw a rise of a shade under 3% to 20.07p per share.

The big news in 2017 was the acquisition of Legal and General Nederland (since renamed Scildon), which helped bring 2017 results in ahead of expectations.

Pre-tax profit more than doubled from £40.7m to £89.6m (with a £20.3m gain from the takeover). The company also reported strong cash generation, excluding the impact of the L&G Nederland acquisition, of £83.9m — from £36.5m a year previously.

Future cash

According to chairman Peter Mason, the integration of L&G Nederland is progressing well and helped towards “an impressive set of results on all financial metrics.” He went on to say: “I remain optimistic that Chesnara can continue to deliver against its strategic objectives, which in turn fund our well established dividend strategy,” adding that “the UK business remains a robust source of cash.

That gives me confidence Chesnara will continue to be a solid dividend payer, and I see longer-term P/E multiples of around 16 as representing good value.

Mason is also optimistic about the company’s ability to continue to focus on acquisitions in both the UK and the Netherlands. And if it can do it the way it acquired L&G Nederland, then I’m looking forward to seeing more of it. 

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Alan Oscroft 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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