For example, with the banking company’s share price near 152p, the price-to-tangible book value is running just below 0.4.

If the firm was in any other line of business, that figure would probably be a big green flag demanding investors’ attention. But who trusts the value of bank assets these days after all that’s happened over the past couple of decades?

A patchy dividend record

However, that’s not the only indicator. The forward-looking dividend yield for the current trading year to September 2024 is around 6.5%. 

But one of the primary considerations when appraising dividend stocks is consistency. And on that score, Virgin Money UK could do better.

The company stopped the shareholder payment altogether during the pandemic, along with other banks. But Virgin’s dividend hiatus was long. There were zero dividends in 2019 and 2020, with a token payment the year after.

In fairness, the directors authorised a bigger total dividend for 2022 than had been seen prior to the pandemic. But the full-year results today (23 November) show that the total dividend for the year to September 2023 is lower at 5.3p per share compared to 10p the prior year.

But that’s not the whole story. The company also announced its intention to extend its ongoing share buyback programme by £150m.

Buybacks have been going on at the firm for some time. In theory, the process reduces the number of shares available. And that means earnings and dividends in the future are distributed over fewer of them. So sometimes the share price can move higher to accommodate the improved per-share figures.

Recovery and growth ahead?

The company’s focus on buybacks does raise the intriguing possibility of a boost to the share price from where it is now.

Meanwhile, the stock is sitting at a level it seems to like! And todays full-year figures don’t look too bad, to me. Although they do include a drop in underlying profit before tax of about 24%. But analysts previously expected an easing of profits somewhere in that ballpark given the tough operational conditions for banks in the period.

There’s the possibility of a recovering general economy ahead. And the company has the potential to do well with its brands of Clydesdale Bank, Yorkshire Bank and Virgin Money in the coming months and years.

Looking forward, chief executive David Duffy said underlying business momentum is “strong”. He thinks the firm’s drive for greater efficiency will support a lower cost/income ratio and enhance the company’s ability to compete in fast-changing digital marketplace.

Growth is on the agenda, for sure. And because of that, Virgin money UK probably isn’t a value trap. But like all banks, it’s a highly financially geared and cyclical operation. And that situation adds an extra layer of risk for investors.

On balance, the business looks like it’s worth additional research and consideration now. But I’d keep the stock on a tight leash if I held it!

The post Earnings: is Virgin Money UK a dividend stock to buy or a value trap? appeared first on The Motley Fool UK.

Same sector, different attributes

The three I’m focusing on today are Virgin Money (LSE:VMUK), Barclays (LSE:BARC) and HSBC (LSE:HSBA). Each bank is slightly different, which gives a nice amount of diversification even within the same sector.

Virgin Money is mostly focused on small and medium-sized enterprises (SMEs) and retail banking. The full year runs through to September, with the final dividend due to be announced then. However, on the basis of the quarterly updates, I’d expect it to be a generous one.

In the Q3 update, it spoke of a “strong capital position” due to good performance. Some of this is being used on £175m of share buybacks, but I’d imagine a bumper final dividend is also in the works.

After tentatively restarting dividends in 2021, last year saw an interim payout of 2.5p and a final dividend of 7.5p. This has grown already in 2023, with an interim one of 3.3p and a final one that I’d expect to be around 10p. The current dividend yield is 6.38%, with the share price up 7% over the past year.

Stalwarts with generous yields

Both Barclays and HSBC are global banks, operating in all areas from corporate banking to institutional capital markets. The main difference is size. Barclays has a market cap of £23bn, HSB’sC is £123bn! When I note the share price performance over the past year there’s another difference. Barclays shares are down 13%, HSBC shares are up 15%.

Barclays has struggled more this year, mainly with operational and control problems. It has also been hit with a slowdown in investment banking, an area it is more dependent on than HSBC.

What impresses me is the current yields on offer. Barclays is at 5.25% and HSBC is 5.42%. This is well above the FTSE 100 average of 3.77%.

Both banks are benefiting from rising interest rates. This is helping to generate more net interest income, which is filtering down to higher net profit. As a result, the dividend per share for both firms has increased since 2021.

Risk but plenty of reward

The main risk I see for the banking sector in the next year is the inflection point with regards to interest rates. I still think the base rate in the UK can continue to rise over the next six months. Yet there comes a point where this really negatively impacts the economy. Loan defaults increase, mortgages can’t be paid and the banks take a hit on this.

As long as the banks can cope with this concern via proper risk management, I think they’re smart buys for income investors looking for growing dividends.

The post 3 UK bank income stocks whose dividends keep growing appeared first on The Motley Fool UK.

Here are two ideas I think could offer very strong share price returns over the next three years.

Banking on further gains

Virgin Money (LSE:VMUK) is a fully fledged bank in the UK, offering everything from mortgages to business accounts. Over the past year, the share price has jumped 12%.

The latest half-year report through to the end of March showed that total underlying operating income was up 10% from the same time last year, supported by strong net interest income. This is the revenue derived from the difference in the interest rate paid out on deposits versus the rate charged on loans.

Thanks to the higher base rate, the margin has been rising. In fact, for the six month period it was 1.91%. Given the lag in the margin increasing versus the base interest rate, I’d expect to see this margin grow well above current levels over the next year. This should enable profits (and the share price) to substantially increase.

Overall deposits grew by 2.6% to £67bn, showing the confidence that consumers have in the bank.

A risk is the higher impairment charges the business is allocating to loans. Bad defaults could be a thorn in the side of the business going forward.

I feel the overall upward momentum can continue in coming years. Three years ago, it made a loss after tax of £232m. Last year, it made a profit of £595m. In this three-year period, the share price has jumped 102%. With revenue and deposits climbing, the runway to achieve a similar performance in the coming three years is definitely there.

Doing a simple job very well

Another company with serious potential is 4imprint (LSE:FOUR). The promotional merchandiser has grown revenue by over 30% in the past three years and almost doubled the profit after tax figure. As for the share price, it has risen by 70% in the past year and 123% in the past three years.

I think that a similar feat can be achieved in the period through to 2026. The business has grown well due to the scalable nature of the goods supplied. Once the large machinery and printing expenses are accounted for, economies of scale are achieved.

Further, the company hasn’t been materially impacted by inflation. This point, noted in several updates, puts it in a very strong position going forward.

It generates most of its revenue from the US and Canada. There’s huge scope to grow existing or enter new markets in coming years.

For example, the UK accounts for just 2% of revenue with 45 employees. This could grow exponentially in coming years. Or what about tapping into Asia or Europe? The upside for the share price is large when considering this.

I’m conscious that the large special dividend on the back of the 2022 results might be cheered by investors, but I would have rather seen it reinvested into further growth.

Overall, I think both UK stocks have the potential to perform very well in the coming few years.

The post Over the next 3 years, these 2 UK stocks could soar appeared first on The Motley Fool UK.

No, I mean shares paying decent dividends, but which also look cheap on other valuation measures too.

My latest top picks are not in the FTSE 100, which is where our favourite dividend stocks are usually found. Today, I’m looking at three smaller ones that I think could be dirt-cheap right now.

Real estate health

Target Healthcare REIT (LSE: THRL) shares are down 35% in five years, most of that in the past 12 months.

It’s a real estate investment trust (REIT), and invests in care homes it rents out. And anything to do with the property market is meant to be poison right now.

There’s a 9% dividend yield, which looks attractive on its own. Falling property values have pushed the share price down. But the shares have fallen a lot further than those properties.

Target shares now trading on a massive 29% discount compared to asset values. That’s like buying pound coins for 71p each.

A forecast price-to-earnings (P/E) multiple of 30 for this year is the only real downside I see. That’s perhaps a bit steep. And it could mean further share price weakness.

But the high yield and big discount makes Target look like a cheap income buy to me.

Builders

I mentioned housebuilders. And I can’t search for cheap dividend shares without finding one. It’s Vistry (LSE: VTY), previously known as Bovis Homes.

We’re looking at another big share price drop in late 2022, knocking a third off the value in five years.

Interest rates are high, mortgages are expensive, and people are struggling to afford homes. I don’t deny the business is under pressure, and 2023 certainly looks like a risky year.

So what about basic valuation measures? The dividend yield is above 8%, though forecasts suggest it should drop to around 6%. But the predicted P/E is under nine, which is way lower than the market average.

Whatever happens in 2023, I just see that as cheap for a company with healthy long-term cash and dividend prospects.

Bank

It’s easy to overlook the so-called challenger banks, such as Virgin Money UK (LSE: VMUK). Its shares have been more volatile than the big UK banks. And they dropped sharply in response to the latest banking crisis brewing in the US. Virgin has underperformed over five years, down nearly 60%.

The bank’s small size has got to make it a riskier investment. Its £1.9bn market-cap is tiny compared to, say, Barclays at £22bn.

In any new financial meltdown, banks with less capital and liquidity are surely more likely to go to the wall.

But we see a P/E of under seven here, expected to drop well below five over the next three years. And we have dividend yields reaching 8% over the same period.

There’s risk, but this is another that I rate as cheap.

The post 3 dirt cheap dividend shares to buy today appeared first on The Motley Fool UK.

Today the shares trade on a forward price-to-earnings (P/E) ratio of 7.1 times. This is well below the FTSE index average of around 13.5 times.

It also carries a chunky 5.3% dividend yield for 2023, well ahead of the 3.6% FTSE 100 average.

So why is Lloyds’ share price this cheap? And should I buy the bank for my portfolio? Here are two reasons why it commands such a low rating today.

#1: A worsening economic outlook

Banks are among the most cyclical stocks out there. When economic conditions worsen, revenues can tank while bad loans can head through the roof.

Lloyds itself has already booked more than £1bn worth of loan defaults. And more hefty impairment charges are likely when it releases full-year results on Wednesday, 22 February.

High street rival Virgin Money put aside an extra £66m for the three months to December, it announced last week. It underlines the huge stress Britains banks face in 2023 and potentially beyond.

Worryingly for the banks, the UK economic picture is bleak and is getting gloomier week after week. This is a particular problem for Lloyds given its focus on British customers.

Last week the International Monetary Fund (IMF) slashed its growth forecasts for 2023. It now expects Britain’s GDP to shrink 0.6% this year, a revision from its October estimate for growth of 0.5%.

The IMF believes the UK will be the only major economy to reverse in 2023. In fact the body upgraded its global growth forecasts to 2.9% from 2.7%. Investing in banks that have overseas operations may be a better option for me in the current climate.

#2: A sinking housing market

All of Britain’s major banks have a share of the homes loans market. But Lloyds is especially exposed to a downturn in the housing sector. It controls around 18% of the mortgages market.

Okay, the long-term outlook for the home loans market is robust. As the UK population steadily grows and homebuilding rises demand for mortgages will naturally rise. And Lloyds could be in the box seat to exploit this growth.

However, tough conditions in the interim could smack the bank’s profits and hamper its ability to pay big dividends.

Bank of England data last week showed mortgage approvals collapsed to 35,600 in December from 46,200 the previous month. This was also the lowest figure since May 2020 when Covid-19 lockdowns were in place.

Higher interest rates and tough economic conditions are also driving an alarming rise in the number of people facing mortgage default.

Would I buy Lloyds shares?

I believe that Lloyds’ share price is cheap for good reason. And I won’t be buying the bank’s shares because of these threats. I’d rather invest in other cheap UK shares for passive income in 2023.

The post 2 reasons why Lloyds’ share price is so cheap! appeared first on The Motley Fool UK.

Why do some sectors benefit from higher interest rates?

Interest rates are very influential in determining the prices of stocks and shares. Generally, theory indicates that returns on debt increase as the costs incurred by borrowers rise. This can cause stock prices to drop as that cost may increase business’ future cash outflows, reducing their present values.

However, financials will directly profit from rising returns on debt as net interest margins will increase while the associated costs will stay relatively level. This is particularly applicable to banks that conduct most of their business through traditional banking activities such as mortgage lending, where an incremental change to interest rates can have a significant effect on the average cost of monthly mortgage payments.

Alternatively, the uncertainty induced by falling share prices from higher interest rates may increase demand for fund managers effective in mitigating market losses, as well as benefit companies with an interest in gold prices — a popular safe haven for capital.

Why I would buy Virgin Money UK

Back in May this year, when the Bank of England raised the base rate to 1.0%, Virgin Money (LSE: VMUK) was able to increase its net interest margin to approximately 1.85% for the year, up from 1.75%. I expect this margin to increase further, which is very exciting for a bank with 80.43% of gross customer loans on their balance sheet being mortgages according to their 2022 interim report. In comparison, mortgages make up 56.21% of NatWest’s lending in the same report.

However, up until now, interest rates on saving have remained low despite base rate increases. If banks like Virgin Money start to compete on higher savings rates, this will start to put pressure on net interest margins and profitability again. However, Virgin Money does not have a notably high exposure to interest-bearing liabilities.

Why I would buy Legal & General

Legal & General (LSE:LGEN) is, undoubtedly, a big name in investment management, pensions, and protection in the UK. Since 2014, Legal & General has not experienced much growth in its share price. L&G currently has around £1.3trn in assets under management and is the UK’s market leader in pension annuities.

A large portion of L&G’s pension product funds will be invested into bonds to generate retirement income for clients. Previously, the low interest rate environment will have been hindering L&G in terms of pre-tax profits since lower bond yields require more funds invested to generate the same amount of income. Clearly rising, interest rates are already relieving pressure on L&G, with its 2022 interim report showing a 212% increase in its solvency ratio.

Quality and a strengthening balance sheet certainly make L&G a potentially solid choice for my portfolio in an uncertain, contractionary market.

The post The Bank of England interest rate hike has met expectations! Are these 2 financials shares to buy today? appeared first on The Motley Fool UK.

When CYBG completed the merger of its peer, Virgin Money (LSE: VMUK), in the middle of 2018, investors pushed shares in the enlarged lender up to an all-time high of more than 350p.

However, the company has come under pressure since the group completed the deal. The stock has slumped 50% from this all-time high, as the bank has failed to live up to expectations. 

Significant challenges

In fairness, there have been some significant challenges for the group to overcome along the way. The integration process was a bit trickier than initially expected and then the coronavirus pandemic arrived. That caused significant disruption across the enterprise when it should have been concentrating on expanding its bigger footprint. 

After two years of disruption, it looks to me as if this business is now getting back on track. According to the company’s latest trading update, covering the three-month period to the end of December, the lender has made solid progress in refocusing its business model away from low-cost credit.

The overall net interest margin, which measures the gap between the cost of the bank’s cash (usually savings deposits) and the amount it charges borrowers, rose to 1.77% from 1.70% in the previous quarter. 

While overall lending balances declined, the company reported an increase in unsecured lending. This is typically credit card lending, which has a significantly higher interest rate than products such as mortgages. 

A cheap UK share in transition 

Virgin Money is in the middle of a significant transition. The company is trying to improve its digital proposition, reduce costs and increase options for consumers. It is also focusing on customer service rather than the race to the bottom that has persisted across the UK banking industry in recent years. 

This strategy is not risk-free. It assumes consumers are willing to pay a bit more for better service. That is not guaranteed in the banking industry.

Meanwhile, some of the company’s peers have considerably deeper pockets and can offer much better deals. This could push customers away from the business in the long run, holding back growth. 

Still, looking at this cheap UK share, I think its depressed valuation more than makes up for these potential risks. Indeed, at the time of writing, the stock is trading at a forward price-to-earnings (P/E) ratio of just 6.5 and a price-to-book (P/B) value of 0.5.

I believe these metrics fail to take into account the company’s potential. In fact, I think the market is focusing too much on what the company was, rather than what it can be as the UK economy returns to growth, interest rates rise and the lender’s growth strategy moves forward.

With these tailwinds behind it, I reckon the market may re-rate the shares to a sector-average multiple. 

Considering many of the company’s peers are trading at a double-digit P/E multiple and a book value of at least one, these figures could indicate that the stock could double from current levels.

Based on this potential, I would be happy to buy the shares for my portfolio today.

The post This cheap UK share, down 50%, could double my money appeared first on The Motley Fool UK.

In particular, I am interested in companies that may be lagging behind the rest of the market in terms of their recovery. I think these stocks could have tremendous potential in 2022 as the world continues to rebuild after the pandemic. 

As such, here are three FTSE 250 shares I would buy for my portfolio in 2022 and beyond. 

Recovery shares to buy

Over the past two years, the travel and tourism sector has experienced one of the harshest environments on record. Unfortunately, it does not look as if the industry will be able to move on from the pandemic anytime soon. 

However, I would like to build some exposure to the sector as a way to invest in the recovery. That is why I would acquire airline Wizz Air (LSE: WIZZ) for my portfolio. 

Of all the companies in the travel and tourism sector, I think this business is best-positioned for the recovery. It entered the crisis with a strong balance sheet stuffed with cash. It also has a relatively low-cost base compared to peers. As other airlines rushed to cut costs and reduce cash outflow during the pandemic, Wizz has had a higher level of financial flexibility. 

These qualities also suggest that the corporation can capitalise on the economic recovery over the next few years. Indeed, management is so optimistic about the outlook for the group the company recently placed a massive order for new planes to expand its fleet significantly. These new planes will help the business meet demand on the new routes it plans to launch.

Passenger demand has already recovered from pandemic lows. According to the group’s latest trading update, in November, Wizz carried 2,172,000 passengers at a load factor of 76.1%. 

Despite the group’s progress, a couple of challenges could hold back its recovery. These include rising fuel costs and competition in its sector. Both of these headwinds could weigh on the company’s bounce back over the next couple of years. 

FTSE 250 challenger

Virgin Money‘s (LSE: VMUK) business model is interesting. The bank is trying to take on the financial sector giants by offering something different. The group focuses on providing a high level of customer service and an engaging electronic offer to attract younger, digital-savvy consumers. 

For example, the group is developing a digital wallet with buy-now-pay-later capability. By spending through the wallet, consumers will also have the potential to earn and utilise ‘Virgin Red’ points. 

This is a consumer reward club operated by the Virgin Group allowing consumers to choose from 150 different experiences they can buy with their points. 

The bank’s ability to leverage other parts of the Virgin empire to attract consumers is also unique. Rivals do not have the reputation or footprint to copy this approach. 

Merger costs 

When it comes to the challenger bank’s finances, the figures are a bit misleading at the moment. After Virgin Money and fellow challenger CYBG merged several years ago, the duo united under the Virgin banner in 2019. Since then, the group has continued to work through the integration process, although this was disrupted by the pandemic.

The combination of the additional costs from the merger as well as rising loan losses in the pandemic pushed the group into the red. 

It looks as if these pressures are now starting to dissipate. This suggests the group’s best days are now ahead. This is the reason why I would buy the stock in 2022. Management plans to reduce costs significantly over the next two years and substantially increase profitability. These developments, coupled with potentially higher interest rates, could help the organisation produce substantial returns for shareholders. 

That said, rising wages could offset some of the company’s cost-cutting initiatives. There is also no guarantee interest rates will increase from current lows, and there is always the threat of additional regulations and taxes, which are the bane of the banking industry. 

FTSE 250 growth play

One of the easiest ways to build exposure to the global economic recovery, in my opinion, is to buy a FTSE 250 recruiter. Hays (LSE: HAS) fits the bill perfectly. And with a large global footprint, it is already riding the coattails of the global economic recovery. 

According to its latest trading update, which covered the period to the end of September, 12 of the regions in which it operates produced record net fees, including the USA and China. 

Overall, fees across the group increased 41% on a like-for-like basis. To meet the rising demand for its services, the company has been investing heavily to recruit and train new staff as well as opening new offices.

The number of staff employed by the company has increased 19%, but despite this growth, the average productivity per consultant remained at record levels in the quarter to the end of September. 

Put simply, it looks as if the need for the group’s services is exploding. And it cannot recruit enough staff to meet this growing demand. That is a great position to be in, especially as the economic recovery is only really just getting started. 

Despite this growth potential, I will be keeping an eye on the economic environment to see if it deteriorates. Recruiters are usually the first to feel the pain in a downturn. Therefore, if the recovery suddenly starts to splutter, Hays may suffer more than most.

The post 3 FTSE 250 shares to buy for 2022 and beyond appeared first on The Motley Fool UK.

UK shares

I’m primarily looking for shares to buy that could benefit from a UK economic recovery over the next few years. 

The property industry is one of the sectors that’s seen the most growth over the past 18 months and may continue to register strong growth. That’s why I’d acquire LSL Property Services (LSE: LSL). 

This property services group is active in all sections of the industry. It provides valuation services for mortgage providers, mortgage broking, and estate agency services. Thanks to this diversification across the industry, growth has rocketed over the past year. For the six months to the end of June, revenue increased 45%, while group operating profit increased 647% to £26.7m. 

The property market’s experienced a boom over the past year, thanks in part to the government stamp duty holiday. It seems unlikely that property prices will continue to increase at a double-digit annual percentage rate. Still, even if growth returns to normal levels, I reckon LSL will continue to reap the benefits. 

This is why the company features on my list of the best UK shares to buy now. It also has a strong balance sheet with £17m of net cash and is distributing profits to investors. The stock currently yields just under 1%, although I wouldn’t rule out further cash returns if profits continue to grow. 

Challenges that could hold back group growth include higher interest rates, which could hurt property market transactions. A lack of qualified staff may also contribute to a growth slowdown.

Growth shares to buy

Another company that features on my list of the best UK shares to buy is Virgin Money (LSE: VMUK). I’d buy this stock because I want to have some exposure to the financial sector over the next few years.

I think this sector will benefit more than most in the UK economic recovery, as it looks as if interest rates increase next year. That could be positive for bank margins. 

Virgin’s better positioned than other lenders, in my opinion, because the group has already made substantial progress with its digital strategy. It’s planning further changes over the next year. These include more branch closures, greater automation and a hybrid working model.

While these changes will incur substantial restructuring costs, they should lower overall operating costs and improve group flexibility when complete. The combination of organic growth and a streamlined operating model should act as a dual tailwind for Virgin Money. 

Challenges it could face as we advance include higher costs and additional regulation, both of which could hold back the group’s growth rate. 

The post 2 UK shares to buy now appeared first on The Motley Fool UK.

I think all of the three companies outlined below have significant growth potential, which is why I would buy them for my portfolio today. 

Growth potential

The first company on my list is the engineering business Weir (LSE: WEIR). The group produces engineering equipment for the mining and oil and gas sectors, and it is currently benefiting from an increase in commodity prices. As prices rise, miners have more cash to spend on new and existing projects. This means more orders for Weir. 

According to its interim results for the six months to the end of June, orders during the period increased 17% and adjusted operating profit jumped 12%. 

I think commodity prices will continue to boom as demand for critical resources expands. Governments are spending significant sums on infrastructure projects worldwide, and the resources for these projects will need to come from somewhere. Weir may continue to benefit as miners grow to meet this demand. 

That is the main reason why I would buy this stock for my portfolio of UK shares. However, I should note that the commodities industry is incredibly volatile. If prices slump, producers could slash orders. That would be terrible news for Weir. 

Recovery play 

In my opinion, casino operator Rank Group (LSE: RNK) is an attractive pandemic recovery play. During the pandemic, the firm’s casinos were forced to close. The company survived by boosting the size of its online business, which provided much-needed cash flow for the organisation. 

Thanks to its online business, the group was in a solid position to stage a recovery as the economy reopened. And since that reopening, in the 13 weeks to 15 August, sales have rebounded. During the period, they were just 19% below the same period in 2019. With average weekly revenues of £5.7m, the firm is comfortably above its cash break-even level of £4.4m. 

I think these figures imply the company is set for a strong recovery in the weeks and months ahead. That is why I would buy the stock for my portfolio of UK growth shares. 

Issues that may destabilise the group’s growth include the risk of another lockdown, and additional regulations, which may increase costs and reduce customer spending. 

Basket of UK shares 

The final company I would buy as a growth investment is Virgin Money UK (LSE: VMUK). 

I think this challenger bank has tremendous potential. Its growth slowed last year, mainly due to the pandemic, but management is targeting expansion this year. The company is trying to grow in personal lending and mortgages, and it is targeting higher interest loans to improve profit margins. 

It is also investing heavily in its digital capability, and this is already yielding results. Over 100k customers have signed up for online products, and it is working with other fintech companies to improve the offering for consumers. 

As the bank pushes ahead with its growth plans, I would buy the stock for my portfolio of UK shares. 

However, this equity might not be suitable for all investors. Banks can be challenging to understand, and if there is a sudden economic downturn, this sector is usually the first to feel the pain. 

The post 3 UK shares to buy with growth potential appeared first on The Motley Fool UK.