Is Provident Financial plc the best FTSE 100 dividend stock?

Investing in the FTSE 100

Provident Financial (LSE: PFG) held its interim dividend steady at 43.2p per share as adjusted pre-tax profits plummeted 22.6% to £115.3m in the six months to 30 June.

The sub-prime lender, which delivered a shock profit warning in June, said the slump in profits was primarily due to changes in the home credit operating model. The restructure involved replacing its 4,500 self-employed collection agents with an in-house team of full-time Customer Experience Managers. It was intended to better manage customer relationships, but had caused a significant deterioration in its collections and sales performance as Provident faced problems with recruitment and training.

As a result, home credit receivables ended the first half £18.3m lower than the same period last year, which led pre-tax profits for the division to fall 85.5% to £6.3m.

Isolated

On the bright side, the disruption had been isolated to its home credit business, as Provident’s other businesses continued to make steady progress in growing its customer base and expanding its loan book. Vanquis Bank, its credit card business, saw a 27% uplift in new customer bookings in the first half, while Moneybarn, its car finance division, recorded growth in new business volumes of 15%. This cushioned the impact to the group’s financial performance and demonstrates the resilience of its diversified business model.

Looking ahead, I reckon that Provident will eventually overcome the disruption to its home credit business. The rationale behind the changes to its operating model remains intact and management continues to be confident that it can deliver revenue and cost benefits in the long run.

Dividends

The stock has been a steady performer in the last few years, with dividends per share growing by an average annualised rate of 14.3% over the past five years. Although its recent shock profit warning has changed things, shares in Provident still trade at a very attractive yield of 6%.

Provident’s problems aren’t going to resolve themselves overnight, but the company has in place a strong management team with proven leadership. As such, I believe the stock would make an attractive turnaround play, although probably not a best pick for investors looking for reliably growing dividends. That’s because, although Provident has so far avoided a dividend cut, its dividend sustainability is under pressure from its near-term earnings weakness.

Better pick?

Segro  (LSE: SGRO), a property investment and development company which focuses on warehousing and light industrial properties, may be a more reliable income pick.

Adjusted earnings per share increased by 3.2% in the six months to 30 June as a shortage of warehouse space drove strong like-for-like rental growth and a fall in its vacancy rate to 5.5%. Net asset value (NAV) climbed 5.4% to 504p a share.

This implies that the shares currently trade at a 3% premium to its NAV, which may seem pricey to many investors given that many REITs continue to trade at significant discounts. Nevertheless, I reckon the REIT could well be worth significantly more, given the combination of its sizeable development potential and the superior market conditions in the warehouse sector.

Following a 5% increase to its interim dividend to 5.25p per share, its shares yield an attractive 3.3%.

Looking for shares to retire on?

If you’re looking for more reliable dividend stocks, The Motley Fool has a free special report that’s aligned with your investing goals: The Fool’s Five Shares To Retire On.

These five large-cap shares have been selected for their combination of income and growth prospects. They generate stable cash flows from their dominant market positions and broad global exposure.

It’s completely free and there’s no further obligation.Get your copy now.

More reading

Jack Tang has no position in any 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.

Can Domino’s Pizza Group plc survive the rise of online delivery services?

A pizza

Domino’s Pizza (LSE: DOM) is proof that you don’t need a unique product or service to generate massive returns. Competition has hotted up in the last few years as online order aggregation companies like UberEats, Deliveroo and Just Eat (LSE: JE.) have created a marketplace where takeaways compete. 

These marketplaces, usually apps, help consumers find the top-rated takeaways in their area and reward quality, low pricing or a combination of the two. Domino’s is not listed on these apps, preferring to sell its pizza directly to customers. 

But can a pizza delivery chain still deliver outsized returns on capital for investors in a world where we have mind-boggling choice at our fingertips? In my opinion, recent results point to a tougher future for it. 

UK sales growth slowed considerably in the last year. Like-for-like sales increased only 2.4%, a far cry from last year’s 13% increase and the entire group grew sales faster due to the opening of more branches and stronger overseas LFL growth. 

Undeterred by slowing growth, the company will shortly open its 1,000th British unit and still has its sights firmly set on growing the portfolio to 1,600. Online sales generated 75% of orders, indicating a heavy cross section of competition between Domino’s and other online ordering websites already. I believe this could be the cause of the sales slowdown in the UK. 

A large Margherita sets you back £14.99. I believe Domino’s rich prices could make it an easy target for other pizza delivery businesses. I’ve switched to a cheaper local alternative and I’m sure many others have too. 

To be clear, I’m not forecasting doom for Domino’s, but a potential slowdown in LFL sales and a  lower return on capital. It might still be a fantastic business with enviable brand strength and product quality thus far keeping the orders flowing in. But the shares are priced as if growth will continue. The P/E is currently 34. To me, that’s a little ambitious despite a strong balance sheet and cashflows. 

Network effects  – the Domino’s fall

If you’re looking to profit from the rise in online food ordering, I’d take a look at Just Eat. It is the largest takeaway aggregator in the UK and has enviable network effects in play that could lead to massive growth. 

As more people order via its platform, it becomes a more attractive marketplace for takeaway restaurants to sell into. These new restaurants increase choice and competition, therefore improving the service as a whole and attracting more customers. This ‘network’ of consumers and sellers is currently growing stronger in a virtuous cycle. 

Because Just Eat is the biggest network in the UK, I believe its network effects could crown it the most dominant. Just Eat’s biggest competitor? It’s not Domino’s or any of the other online aggregators – but the telephone. 

Roughly half of all UK takeaway orders are still made by phone. As new generations earn enough pocket money to order pizzas, I’d expect this ratio to drastically fall until almost all orders are completed online.  And I’d expect the largest network in the country, Just Eat, to be the natural benefactor of this channel shift. 

The shares are currently priced at 67 times earnings, but with LFL revenue rocketing 40%, the shares could easily outgrow this valuation.

If these two growth shares are too risky for you, or if you’re not a fan of the takeaway sector, maybe you’d be more suited to our top growth stock. This undeniably suave chain has been charming the cash from the wallets of both Brits and international investors for years now. Our top analyst believes this expansion story could quadruple in value by 2025 if everything goes without a hitch. Click here to download the free report.

More reading

Zach Coffell has no position in any shares mentioned. The Motley Fool UK has recommended Domino’s Pizza and Just Eat. 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.

Rathbone Brothers plc is a growth stock that could have far more to give

currencies notes cash

I’ve been looking at Rathbone Brothers (LSE: RAT), and the investment manager’s first-half results released Tuesday are making me sit up and pay close attention.

Rathbone shares have climbed by 52% since 2016’s low in October, to 2,667p (including a results-day 37p rise), and have doubled in price over the past five years.  The reason for that seems apparent from the company’s recent performance — we’ve seen earnings per share growing by 58% in just four years, with analysts forecasting a further 15% gain by the time we reach December 2018.

While the company spoke of “ongoing geopolitical uncertainty” which is currently dominating short-term market conditions, we did see underlying pre-tax profit rising by 22.7%, to £43.3m, in the first six months of the year.

Funds

The key long-term measure of confidence in an investment manger is its level of funds under management, and we saw a 7% rise to £36.6bn since December 2o16 — and seeing as the FTSE 100 put on only 2.4% over the same period, I’m impressed by that.

I would not place my own investment cash under the control of a professional manager, purely because I think my own simple strategy is effective enough without paying anyone else to do it for me. But there are many, from private investors to charities and pension funds, who need the services of companies like Rathbone — and I reckon buying shares in investment managers themselves can be very rewarding.

I see what might be thought of as contrarian safety here too — it’s when markets are at their most volatile that people turn more to respected professionals to manage their cash. 

And I see Rathbone Brothers as a well-managed and well-respected firm that should continue to do well.

Corporate finance

Financial services at all levels can be very profitable, and I’ve also been examining Intermediate Capital Group (LSE: ICP). The company provides capital for a variety of corporate needs, including IPO, management buyouts and similar.

The first quarter of this year has been pretty good, with inflows in the period of €0.6bn coupled with “robust demand for current fundraising“.

The firm did see a 2% drop in funds under management, to €23.3bn, in the three months, but it put that down to an “expected quieter quarter” and an adverse currency exchange impact on dollar-denominated funds among other things. But inflows in the second quarter are expected to be higher.

Outgoing chief executive Christophe Evain said: “Our expectation continues that this will be a strong fundraising year,” and that supports expectations of a good year this year.

One for the brave?

Intermediate Capital is in a volatile sector, and that can show through in erratic share price movements. But one thing I see as a long-term calming effect is the company’s progressive dividend.

It’s grown from 20p per share in 2013 to 27p this year, and though an impressive share price performance over that timescale has dropped the yield to 3.8%, we’re also looking at a trailing P/E of under 10. Dividend cover is strong, and I expect to see yields increasing nicely over time.

If you’re happy to handle short-term volatility without panicking (which I see as an essential characteristic of a growth investor), I really do see Intermediate Capital Group as having solid long-term potential.

Big money from growth shares

Growth shares like these can be very profitable, and the tempting pick uncovered in our Top Growth Share From The Motley Fool report has been raking in the cash for years.

The past five years have brought in double-digit annual earnings growth, and the City’s experts are predicting two more years of solid growth ahead of us. On top of that, a progressive dividend policy adds an extra attraction to the mix.

What to know more? Just click here right now for your personal copy, and it will be despatched across the wires direct to your email inbox, completely free of charge.

More reading

Alan Oscroft has no position in any 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.

Could dividend stocks Games Workshop Group plc and Royal Mail plc help you retire early?

Games Workshop

Shares of Games Workshop (LSE: GAW) climbed as much as 10% to over 1,460p by noon today after the wargaming firm released excellent results for its financial year ended 28 May. The company also said, in a separate announcement, that trading since the year-end has continued strongly and that “profits for 2017/18 are therefore likely to be above market expectations.”

For 2016/17, the company reported a 34% increase in revenue, benefitting from favourable exchange rates, as 75% of its sales come from outside the UK. At constant currency, the increase was a still-impressive 21%. Net operating cash flow soared by 81% to 136.6p a share from 75.5p, putting the company on an attractive price-to-cash flow (P/CF) multiple of 10.7. Equally attractive is an 80p dividend that gives a running yield of 5.5%.

Game on

Games Workshop’s business is appealingly simple, as is the explanation of it provided by Kevin Rountree, a company veteran who became chief executive in January 2015.

Mr Rountree said in today’s results: “Games Workshop’s ambitions remain clear: to make the best fantasy miniatures in the world and sell them globally at a profit, and it intends doing so forever … All of our decision-making is focused on the long-term success of Games Workshop, not short-term gains.”

On the subject of shareholder value, he said: “We believe shareholder value is created, primarily, by not destroying it. We have no intention to acquire other companies, nor to dispose of any of those we own. We return our surplus cash to our owners and try to do so in ever increasing amounts.”

Attractive buy

For over a quarter of a century, Games Workshop has demonstrated its ability to nurture new generations of hobbyists, expand its business across the globe and, more recently, generate a rising income stream from licensing its IP for digital media without cannibalising its core business.

With plenty of scope for continuing global expansion — and rising disposable incomes in many markets providing a favourable backdrop — I see Games Workshop as an attractive stock to buy for the long term.

Affordable dividend

Royal Mail‘s (LSE: RMG) growth in its last financial year was considerably more modest than Games Workshop’s. The FTSE 100 giant posted an underlying revenue increase of 1% and a 5% rise in net operating cash flow to 76.2p a share from 72.7p. However, the P/CF multiple at a current share price of 392p is just 5.1, while the 23p dividend gives a running yield of 5.9%.

Royal Mail’s dividend is eminently affordable based on current cash flows, even after taking account of capital expenditure and other necessary costs, which reduced net operating cash flow of 76.2p a share to 42.4p. The company reckons this “in-year trading cash flow”, as it calls it, will support its progressive dividend policy.

Structurally challenged

However, the group’s letters business is in structural decline (the company forecasts volumes falling between 4% and 6% a year) and while the parcels division is growing, this is a competitive, commodity business.

I see Royal Mail as an attractive stock for a high income in the near and medium term. But due to the challenging industry fundamentals, I’m expecting its returns to be increasingly outpaced by those of Games Workshop in the years and decades ahead.

Five elite stocks

I’m keen on Games Workshop and can see Royal Mail appealing to some investors. But are these stocks among the elite five companies the Motley Fool’s experts have identified as the UK market’s very best businesses?

You can discover the answer and read their detailed analysis of all five companies in this exclusive FREE report.

The report comes with no obligation, so CLICK HERE now for your free copy.

More reading

G A Chester has no position in any 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.

Are these banks better long-term buys than Lloyds Banking Group plc?

Lloyds Banking Group (LSE: LLOY) is no doubt a popular banking share in the UK. In fact, the stock is regularly the most traded stock across the whole market, let alone the banking sector. After years of poor profitability, Lloyds’ prospects are definitely looking up.  

Having said that, Lloyds isn’t the only UK bank that looks to offer investment potential right now. Many of the challenger banks are trading at very attractive valuations. Could these stocks outperform Lloyds in the long run?

Aldermore Group

With a market cap of £770m, Aldermore Group (LSE: ALD) is a much smaller outfit than Lloyds. However, smaller companies can provide excellent growth opportunities and this is a bank that is growing at an impressive rate.

Over the last two years, revenue and net profit at the challenger bank have surged from £175m and £38m, to £278 and £94m, and City analysts expect growth of 10% and 9% respectively this year. Earnings per share of 29.4p are forecast for FY2017, placing the bank on a forward looking P/E ratio of just 7.6. By contrast, Lloyds trades on a forward looking P/E ratio of 9.2.

Aldermore is expected to pay a maiden dividend this year, with analysts pencilling in a payout of 3.75p per share at present. That equates to a yield of 1.7%, which is lower than Lloyds’ yield however, the payout is forecast to grow significantly in coming years.

In its full-year results in March, Aldermore stated that Britain’s exit from the EU was unlikely to have “any material impact” and that the loan book should grow between 10%-15% this year. It went on to say that it expects to deliver a return on equity in the high teens over the medium term. An update in May stated: “Aldermore has made an excellent start to the year, with continued strong progress on our strategic priorities and financial performance ahead of our expectations.”

The next update from the bank is interim results on 10 August. This is one to watch closely in my opinion.

Virgin Money Holdings

Also offering value in the challenger bank space is Virgin Money Holdings (LSE: VM), provider of residential mortgages, savings, credit cards and currency products.

Like Aldermore, Virgin Money has recorded impressive growth in recent years with revenue and net profit surging 13% and 26% respectively last year. City analysts have forecast growth of 12% and 13% for FY2017.

The £1.35bn market cap bank released its interim results this morning and while underlying profit before tax surged 26% to £128.6m, the market wasn’t impressed with the bank’s net income margin of 1.59% and slightly lower net interest margin guidance for the full year. As I write, the shares are down 7%.

However, the challenger bank did enjoy a 7% rise in customer loan balances and a decrease in the cost-to-income ratio to 53.9% from 58.8% last year. Impressively, the interim dividend was boosted a significant 19% to 1.9p. Chief executive Jayne-Anne Gadhia stated: “We will continue to drive growth, quality and returns, put customers at the heart of everything we do, and we remain on track to sustain a solid double-digit return on tangible equity (RoTE) in 2017.”

After the 7% fall today, Virgin Money Holdings now trades on a forward looking P/E ratio of just eight. For patient long-term investors, I believe the fall could be a good opportunity to buy the shares at an attractive valuation.

If you’re serious about financial independence, start here

The Motley Fool recently published a brand new exclusive early retirement report called The Foolish Guide to Financial Independence. If retiring early is a goal of yours, I’d highly recommend reading the report.

It’s FREE, comes with no obligation and can be downloaded within seconds simply by clicking here.  

More reading

Edward Sheldon owns shares in Aldermore Group. The Motley Fool UK has recommended Lloyds Banking Group. 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.

Why this emerging markets underdog can thrash Unilever plc

Unilever sign

Diversified consumer goods company PZ Cussons (LSE: PZC) is often compared to industry leader Unilever (LSE: ULVR). Both companies generate profitable repeat sales from established consumer brands and have enviable exposure to emerging markets. These desirable traits could produce both growth and income over the long term, but which company will be the winner for years to come?

Cussons has had a hard time of it in recent years and will probably struggle to rival Unilever’s £131bn market cap in our lifetime. However, I’m confident that the agile growth company can outperform its lumbering rival over the next few decades.

Its revenues fell from £821.2m in 2016 to £809.2m in 2017 after issues in Nigeria intensified. Operating profit follow suit, falling 2% to £106.3m. These figures won’t attract hordes of growth-hungry investors, but those in it for the long term should appreciate how robust the company’s performance has been in the face of considerable macroeconomic headwinds.

This quote from the company’s annual report illustrates the severity of Nigeria’s economic situation: 
“The introduction of a new flexible exchange rate regime in June 2016 led to a 50% devaluation of the Naira to US Dollar on the interbank market.”

In real terms, the Nigerian consumer has had to pay 50% more for everyday items this year than last, yet despite this, Cussons’ Nigerian business registered only a 14.5% fall in revenue. In constant currency terms, sales increased 4.5%. That’s a considerable swing in performance driven by a factor completely outside of PZC’s control, yet considering the context, it’s not a bad performance.

The company has managed to maintain profitability, despite these conditions, through a combination of overhauling packaging, manufacturing costs savings and by tweaking prices. Local sourcing and manufacturing capabilities have helped weather the worst of currency headwinds, too.

The Nigerian economy is very much tied to the oil price and Cussons’ results could, therefore, be volatile over the next few years. The company is performing strongly in Europe and Asia however, which seems likely to provide more steady, if less explosive, growth over the long term. After a 2.1% hike in 2017, the company has now paid — and increased — a dividend for 44 consecutive years.

In the long term, I’d expect the brand loyalty the company is developing in countries like Ghana, Nigeria and Malaysia will pay off as populations expand and wealthier middle classes emerge. If we head back to a time where trading conditions were favourable, we can see the potential growth on offer at the company. Between 2008 and 2011, the company grew profits by over 65%.

Unilever, on the other hand, is far more diversified than PZC and is, therefore, less likely to be held back by poor performance in any given country. That said, its sheer size is a barrier to growth. The company increased underlying sales by 3% in the first half of this year, although margins have improved faster than expected, driving underlying earnings per share 14% higher. This sort of margin improvement, while very impressive,  is unsustainable year-in-year-out, whereas Cussons could realistically expand revenue for decades.

Unilever currently trades on a PE of 21 while yielding 2.9%. Cussons is 24 and 2.3% respectively.

Rather than pick between the two, I’d buy both of these companies, but I feel the troubles in Africa are more than priced into PZC, which has the potential to outpace Unilever’s more steady expansion.

If you’re unsure of PZ Cussons’ long-term prospects – and that would be a fair position to hold given Nigeria’s reliance on the oil price – you may be more suited to our top long-term buys.

Our analysts have been on the lookout for companies that are likely to thrive in the long term. We’ve found a number of robust businesses that throw off loads of cash in the form of dividend payouts. In fact, Unilever counts itself among their number. Click here to discover four more of our top analyst’s long-term stock picks.

More reading

Zach Coffell has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK owns shares of PZ Cussons. 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.