Little and large

In many ways, the two companies couldn’t be more different. HSBC, with a history stretching back to 1865, is a FTSE 100 giant with a market capitalisation of £125bn. PCF, which began life in 1994 as an asset finance house and granted a banking licence as recently as December 2016, is an £80m-cap company listed on London’s junior AIM market. HSBC has a universal banking model and an international network covering 90% of global trade flows. PCF operates in niche segments and all its revenue is currently generated in the UK.

Growth strategy

In today’s trading update for its financial year ended 30 September, PCF reported a 50% increase in its lending portfolio to £219m. Management said it remains confident of growing that portfolio to £350m by fiscal 2020. It reckons it can meet this target through organic growth of existing products in its two divisions: Consumer Finance, which provides finance for motor vehicles to consumers; and Business Finance, which provides finance for vehicles, plant and equipment to SMEs.

The company’s longer-term objective of having a £750m lending portfolio by fiscal 2022 will require acquisitions, strategic partnerships, or the setting up of new specialist teams. Earlier this month, it announced a £5.6m acquisition of a provider of funding and leasing services to the broadcast and media industry. This, and future deals, are intended to diversify its lending niches as well as provide some geographical diversification.

Car crash?

City analysts are forecasting 25% earnings growth when PCF reports its full results, giving a price-to-earnings (P/E) ratio of 20.2, at a share price of 37.5p. For fiscal 2019, forecasts of earnings growth in excess of 60%, bring the P/E down to 12.5.

However, while the valuation appears attractive on paper, I’ve written previously about what I see as a consumer credit bubble in car financing. PCF has substantial exposure to this area — 46% of the loan book at the last count — and exposure is likely to remain significant, even with the company’s plans for diversification. Due to this factor, and my caution on UK-focused lenders generally, I personally see PCF as a stock to avoid.

All-round appeal

I reckon HSBC’s extensive business and geographical diversification makes it a more attractive proposition for investors. This helped the group to be relatively resilient through the financial crisis and the current valuation and prospects look appealing to my eye.

City analysts are forecasting a 40% increase in earnings this year to $0.67 a share (51.5p at current exchange rates) giving a P/E of 12.2 at a share price of 627p. For 2019, the P/E falls to 10.9 on forecasts of a 12% advance in earnings to $0.75 (57.7p). HSBC also offers a generous, if currently static, dividend of $0.51 (39.2p), giving a yield of 6.25%. As such, this is a stock I’d be happy to buy today.

Today I’m looking at two companies with extreme positions. One offers an 8% yield, but shows little sign of growth. The other has a low yield but is expected to increase its payout by 50% in 2018 and 2019.

Start small, grow big

PCF Group (LSE: PCF) is a company you may not have heard of. This £63m specialist bank offers savings accounts and provides finance for cars, plant and other machinery.

The company gained a banking licence in 2016, enabling it to offering savings products to retail customers. This was a milestone, as retail deposits are a much cheaper source of funding than wholesale debt. PCF can now make more profit from lending, allowing it to expand more quickly.

Strong growth

In a trading statement issued today, the firm revealed that since launching its savings accounts in July 2017, it has collected £81m of retail deposits. It’s now in the process of retiring some of its wholesale debt and replacing it with retail deposits.

Lending is also growing rapidly. New loans rose by 93% to £54.5m during the five months to 28 February, compared to the same period last year. PCF’s total loan portfolio has now grown to £172m, and the bank is targeting £350m by September 2020.

Lending quality seems good — impairments were just 0.5% last year. Return on equity fell to 8.7% last year due to heavy investment, but management’s medium-term target of 12.5% seems reasonable and attractive to me.

A dividend grower?

PCF isn’t without risk, as lending on vehicles and machinery can suffer high default rates in a recession.

The stock’s forecast P/E of 12 looks affordable, but at 1%, the dividend yield is low. However, this forecast payout is covered 6 times by forecast earnings and is expected to rise by 50% next year. I see this as a potential long-term dividend growth buy.

An 8% yield today

If you’re looking for dividend stocks that can pay you a high yield right now, PCF may not suit. But my second stock, PayPoint (LSE: PAY), might be of interest.

This company is best known for its network of payment processing terminals in convenience stores. These allow customers to pay a wide range of bills with cash, card or by mobile. PayPoint operates a similar business in Romania.

It’s very profitable, with a five-year average operating margin of almost 20%. A long period of strong growth between 2012 and 2017 saw the group double its profits and build up a £53m net cash pile.

In 2017, PayPoint completed the sale of services it considered non-core, as they weren’t connected to its retail network. The firm is now gradually returning surplus cash to shareholders while focusing on its core business.

Analysts expect the Hertfordshire firm to deliver earnings of 61.6p per share this year, with ordinary and special dividends totalling 69p. This leaves the stock on a forecast yield of 8.6%, with an underlying ordinary yield of about 5.6%.

Like-for-like revenue rose by 3.6% during the first quarter and the outlook for earnings seems stable. I rate this as a dividend buy and recently added the shares to my own portfolio.