The FTSE 100 enjoyed a great 2016 as heavily indebted miners turned things around, rising oil prices lifted oil majors’ share prices and the weak pound made companies with loads of foreign earnings look even more impressive. Yet largely left behind by this rally were financial services firms as they battled fears over a Brexit-induced economic downturn and loss of access to the EU market. However, this overly bearish reaction has made valuations look very attractive for my top two FTSE 100 shares for 2017, sub prime lender Provident Financial (LSE: PFG) and insurer Prudential (LSE: PRU). Â
Provident may not be a household name but offering door-to-door, auto and credit card loans to sub prime lenders has been big business for the company for well over a century now. One reason I find this business appealing is that it’s largely recession proof. During economic downturns Provident gains customers who normally wouldn’t consider sub prime loans but are forced to. And in good times, customers use more credit to open a credit card or finance a new car loan. In either scenario Provident comes out with higher revenue and profits.
Indeed, in the company’s latest half-year results, underlying pre-tax profits leapt a full 17.6% to £148.9m as both customer numbers and average receivables grew. I believe Provident has all the necessary tools to continue this success for years to come as it compounds its market leadership in the core consumer lending sector with new online loan offerings and its fast growing, high margin, relatively lower risk credit card business.
Furthermore, a healthy balance sheet and five consecutive years of double-digit earnings growth provides the firepower for Provident to return a whopping 4.23% annual dividend yield to shareholders. Hefty dividends, counter-cyclical earnings, a long history of success and a reasonable 16.7 forward P/E put Provident at the top of my FTSE 100 watch list for 2017.
Geography prize
2016 was a tumultuous year for Prudential as slowing Chinese economic growth and the Brexit vote sent shares whipsawing up and down before finishing the year strongly up 7%. But even after this year-end rally, I reckon the shares are still a relative bargain at 14 times forward earnings.
Why? Because Prudential has incredible long-term growth potential due to its large presence in Asia. The economic centre of the world is gradually but inexorably shifting towards the Asia Pacific region and Prudential is well-placed to benefit thanks to a long history of offering insurance and asset management products to the region’s residents. We can see this paying off in the company’s latest half-year results, where Asian new premium sales rose a full 21% year-on-year and led to a 15% rise in regional operating profits.
Prudential also combines strong growth prospects in Asia with steady growth and high profitability from its American asset management division and UK insurance and investment products. To me this geographic diversification makes Prudential a far more attractive option than UK-focused competitors that live and die based on the economic health of a single country. All told, Prudential’s strong balance sheet, high growth potential and 2.45% yield that’s covered 3.2 times by earnings make it one share I like in 2017 and beyond.