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Forget the 7% yields! I reckon this dividend stock could plummet

For income chasers, Arrow Global Group (LSE: ARW) has proved to be something of a hero in recent times. A combination of eye-popping cash generation and great profit growth has given it a platform to raise dividends by a colossal 149% over the past five years.

But I have to say that not even predictions of another hefty dividend rise in 2019 — from 12.7p per share last year to 15.4p this time around — is enough to tempt me to buy the financial giant today. And nor is a subsequent market-bashing payout yield of 6.9%.

There’s a very good reason why Arrow Global is one of the most shorted stocks on London indices right now (according to shorttracker.co.uk it’s in the top three), namely increasing fears over Brexit and how this will impact profitability in the near term and beyond. And I share the market’s apprehension.

Bale out on Brexit worries

The business is involved in buying up debt and then subsequent collecting it. Although it’s been ramping up its operations in Europe in recent years, the threat of severe economic turbulence in its home market is casting doubts on how much of  this debt it’ll actually be able to recover.

As I’ve noted before, Britain’s major listed banks are already battling against a steady rise in the number of bad loans on their books, reflecting the impact which Brexit uncertainty is causing across the UK economy. Heaven knows how bad things could get should the impasse on resolving the political saga persist or, even worse, politicians push the country down the road of a destructive no-deal exit from the European Union.

Sure, Arrow Global may have been taking steps to insulate itself by buying up better-quality debt. But in the event of a disorderly Brexit outcome — a scenario which many suggest would even push the UK into recession — it’s still likely to be fighting a losing battle to keep its growth story on track.

It’s not all about Brexit, though

However, the possibility of an economic crash in the UK isn’t the only concern for the company’s shareholders. I’m not talking about the impact of a broader slowdown in the global economy, either. There’s also been plenty of public scrutiny over accounting issues at the loans specialist, and the prospect of fresh rounds as we move through 2019 and beyond provides more reason to be cautious.

So forget about Arrow Global’s big yields and its lowly forward P/E ratio of 5.1 times. There’s good reason why the company is valued so cheaply and is likely to remain so as the risks to its bottom line rise.

City brokers currently suggest group earnings will rise 20% in 2019, although I reckon this figure is in danger of being hacked down sooner rather than later. My advice? Give the big yielder a very wide berth and go dividend shopping elsewhere. 

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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 us better investors.