Full year results for doorstep lender Morses Club (LSE: MCL) included a strong 10% year-on-year rise in revenue and 7.7% increase in pre-tax profits but neither of these accomplishments were what caught my eye in the company’s report. Rather, it was the fact that management intends to pay a maiden full year dividend of 4.3p, which together with the interim dividend of 2.1p represents a yield of 4.7%.
This is already an impressive yield but the company still has plenty of room to increase shareholder returns in the coming years.
|
|
2015 |
2016 |
|
Revenue (£m) |
90.6 |
99.6 |
|
Credit Issued (£m) |
122.2 |
144.1 |
|
Adjusted EPS (p) |
10.2 |
10.8 |
|
Dividend per share (p) |
0 |
6.4 |
As we see, the company is growing at a solid clip by offering loans to the millions of subprime customers who are ignored by high street lenders due to regulatory pressure and lack of adequate returns. However, low returns aren’t a problem for Morses Club, which has a history of working with these types of clients and has the necessary knowledge to accurately judge their ability to repay the loans.
In FY17 the company return on equity (RoE) was a stunning 27.2%, a smidge under the 27.9% recorded last year but still high enough to be the envy of any high street bank. Returns this are producing enough cash flow to both expand the business by investing in new agents and branches while simultaneously providing for increased shareholder returns in the years to come.
Aside from growing the topline the company also has room to expand profits as it takes advantage of efficiencies of scale from expansion. In FY17 costs as a percentage of income fell from 58.9% to 56.9% due to these benefits.
As costs fall and revenue and profits rise there is considerable scope for Morses Club to juice shareholder returns. With the company’s shares trading at just 11 times forward earnings while offering a 4.7% dividend yield this is one stock I expect big things from in the future.
Big brother leads the way
Management at Morses Club has a very good role model to follow in Provident Financial (LSE: PFG), the UK’s leading doorstep lender by a large margin. Like its smaller rival, Provident also provides investors with a very hefty 4.2%-yielding dividend that is covered a safe 1.3 times by earnings.
Aside from a very solid dividend, the company also offers investors significant peace of mind. This is because although many think of subprime lending as incredibly cyclical it’s actually quite stable. While high-street lenders lost gobs of cash during the financial crisis Provident was able to keep RoE above 45% and actually grow profits as it gained new customers that were previously served by mainstream banks.
And non-cyclical returns don’t at all mean the company isn’t growing. In FY16 the core doorstep lending division increase pre-tax profits 9.3% to £115.2m while the fast growing Vanquis Bank credit card division increase pre-tax profits a full 11.3% to £204.5m
With all divisions reporting enviable growth while maintaining tight credit standards, a high dividend and a relatively sane valuation of 17.6 times forward earnings, Provident Financial is one stock that should attract growth and income investors alike.