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2 FTSE 250 stocks yielding 4% I’d buy today

The UK banking scene has, historically, been quite a boring place dominated by the big four. However, recently there’s been a surge in activity across the sector partially among challengers, which are shaking up the market for financial services.

First of all, there was a merger between Virgin Money and CYBG. Then shares in Metro Bank, the first high-street bank to be granted a new banking licence for 150 years in 2010, plunged after it admitted a mistake in calculating the value of loans on its balance sheet. And now, challenger banks OneSavings (LSE: OSB) and Charter Court Financial (LSE: CCFS) have announced they are exploring a merger.

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Banking tie-up

The OneSavings/Charter merger has been announced officially today. The initial proposal says that for each Charter share, holders will receive a 0.8253 chunk of a new OneSavings share which, when all said and done, will give Charter investors 45% of the combined group immediately after completion. 

Managers believe the deal will unlock £22m in annual pre-tax cost savings in the three years after the transaction. Around 30% of these cost savings are expected to be achieved in the first 12 months after a merger. 

The two banks, both of which specialise in lending to buy-to-let investors, should be able to use their enhanced size both to attract new customers and offer better deals to existing borrowers. They are already firing on all cylinders. Today, OneSavings reported a 15% increase in underlying profit before exceptional items to £193.6m for the full-year. Meanwhile, Charter announced a rise in pre-tax profit of 42% for the year ending 31 December 2018. A strong demand for buy-to-let and residential mortgages helped the company increase its loan book by 24% during the period, to £6.7bn.

Taking market share 

Using today’s numbers, when combined, OneSavings and Charter will have a loan book worth around £15.7bn. This is tiny in comparison to the UK’s largest banks, such as Lloyds (£444bn of loans and advances to customers outstanding at the end of 2018), but with the size of the loan book growing at 20%+ per annum, the combined group should quickly be able to scale up.

And when the deal is complete, I think shareholders will be well rewarded as both of these companies have plenty of scope to increase their cash returns to investors. 

Today, Charter announced its inaugural dividend of 12.7p per share, (on earnings per share of 50p) giving a dividend yield of 3.8%. OneSavings hiked its distribution to investors to 14.6p for the full year, (on earnings per share of 58p) giving a dividend yield of 3.7% at the time of writing.

Considering the fact that both companies have plenty of headroom to increase dividends by 100% or more without factoring cost synergies from the merger, I think there is a solid chance that the combined OneSavings and Charter could become one of the financial sector’s best income stocks — that’s without factoring in the explosive growth both firms are currently registering (as I have said before, based on its growth, I think OneSavings alone could be worth as much as 694p). That’s why I would buy these two FTSE 250 challenger banks today.

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Rupert Hargreaves owns no 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.