I believe Secure Trust Bank (LSE: STB) is one of the most overlooked income stocks on the London market today.
The £250m market cap financial services business has an excellent dividend track record. The payout has increased by an average of 6% per annum since 2013, rising from 62p to 83p per share today.
And City analysts don’t expect this trend to come to an end any time soon. They believe the payout will grow by an inflation-busting 4% to 86.2p this year and a further 4.3% in 2020 to just under 90p per share. If the company meets these targets, then the stock will yield an estimated 6.7% by 2020, with the payout covered an estimated 2.3 times by earnings per share.
In my opinion, this dividend track record deserves a premium valuation. However, the market seems to be overlooking the opportunity here. At the time of writing, shares in Secure trade at a forward P/E of just 7.6, despite the fact analysts believe the group’s earnings per share will jump 17% this year and a further 19% in 2020.
However, according to the financial group’s first-half results to the end of June, adjusted earnings per share increased ‘only’ 10.2% year-on-year. Adjusted operating profit (profit before the impact of one-off gains or losses) before tax jumped 13.9%. Statutory profit before tax, which includes one-time gains and losses achieved by the company during the half, increased 19.9% to £18.1m
These results indicate that the company’s growth for the full year might come in below City expectations, but it doesn’t look as if analysts are that far off the mark.
As well as the firm’s double-digit earnings growth, it also has a healthy balance sheet with a common equity tier 1 ratio of 12.8% and a capital ratio of 15.2%.
So, if you are looking to invest in a well-capitalised, undervalued and fast-growing business with a dividend yield of 6%, I highly recommend taking a closer look at Secure.
Another financial group with a market-leading dividend yield that I would consider adding to my stocks and shares ISA today is Provident Financial (LSE: PFG).
Provident has had a series of problems over the past few years, both self-inflicted and regulatory. However, it looks as if management has finally managed to put the bulk of these issues to bed.
Earlier this year, Provident reported full-year profits slightly ahead of analysts’ expectations and restored its dividend. The sub-prime lender also said it had resolved most of its regulatory problems.
Analysts are not forecasting a complete earnings recovery for the firm just yet, but they are forecasting explosive dividend growth for the next two years.
From a token payout of 10p in 2018 (down from nearly 100p per share in 2016) the City has pencilled in a dividend payout of 26p for 2019, rising to 35p for 2020. Only time will tell if the company has what it takes to hit these forecasts, but I think the risk is worth taking.
Based on current earnings projections, the stock is trading at a P/E of just 7.8, falling to 6.5 for 2020. What’s more, analysts’ current dividend outlook suggests investors are in line for a yield of 6.9% for 2019. In my view, this potential reward more than outweighs the risk of investing.
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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.