International Personal Finance (LSE: IPF), the consumer lending firm focused on Poland and other Eastern European countries, has been paying dividends with a yield that reached 6% last year. And forecasts suggest shareholders could pocket a fat 10% in 2019, after a shock 20% share price fall Friday.
What’s more, the dividends have been covered more than 2.5 times by earnings, so what’s not to like?
First up, these super yields have arrived as a result of a collapsing share price. Over the past five years, International Personal Finance shares have lost almost 80% of their value. That’s pushed the dividend yield up from just 2.7% in 2014, even though in cash terms it’s only gained 3% over the total period.
Legal changes
What happened Friday? The sudden price drop comes after the firm revealed changes to consumer credit legislation in Poland. The country has been proposing to lower the current non-interest charges that lenders can levy on consumer borrowers, and the Council of Ministers has now made further amendments.
The government is now considering a level cap of 10% of a loan’s value, down from the existing 25%, and to cut the per-annum cap from 30% down to 10% too. The overall total of such charges would not be allowed to exceed 75% of the value of a loan, a cut from the existing 100% cap.
We’ll have to wait and see what effect this will have on forecasts and whether the mooted big dividend will hold up. But I have wider concerns as governments are increasingly tightening up on high-margin lending operations, and I wouldn’t be surprised at all to see further legislative crackdowns in the coming years.
Woodford favourite
Provident Financial (LSE: PFG) has suffered similarly, since its share price crashed by 60% in August 2017 when the firm withdrew its interim dividend in the face of a number of problems with its home credit business.
It was a blow for Neil Woodford, whose flagship Woodford Equity Income Fund was recently suspended following a run on withdrawals, and he’s been unfortunate to put cash into a handful of duds now. His other spectacular recent failure is Purplebricks, whose overstretched business has now lost 80% of its peak value.
On forecasts, Provident Financial shares command a P/E of 8.3 and offer a dividend yield of 7.2% for the current year, and those figures would move to 6.7 and 9.4% respectively in 2020. Dividend cover by earnings is around 1.6 times for each of the two years.
Tough choice
On those fundamentals, the shares look good value, but the market is having none of it right now. The share price blipped up on 5 June after the failure of a hostile takeover attempt from Non-Standard Finance, and for a few days it looked as it that might have been the signal for an upwards re-rating of the share price — takeover bids often come along when a company is significantly undervalued.
But that turned out to be a false hope, the brief gain was quickly reversed, and the shares have since slid further.
I’m torn, looking at attractive fundamental valuations on one hand, but a sub-prime lending industry that’s becoming a bit of a political pariah on the other. With my fears that the sector could be hit by further legislation in the next few years, I’m keeping away.