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If you can buy in at the right price, these bonds offer value. The dividend on the shares is equally attractive
February 29, 2012

Provident Financial PLC, the provider of unsecured consumer loans has released an upbeat set of results. (click here to read our view of the company's shares) The door-to-door lender reports profits for 2011 up by 12.2 per cent to £162m, boosting the dividend for shareholders and also allowing for retention to grow its own capital base.

IC TIP: Hold

The results appear to be well-received in the equity market with the shares jumping up over the £11 mark, and on the cusp of making a new 10-year high. What of the bonds? I would suggest that there is value to be found in here.

The chart below shows an overlay of the Provident Financial 7% 2020 bond against the underlying gilt. I first covered this security at launch in March 2010, viewing the bond as a buy at 100p for its 7 per cent YTM. Since then, there has been a fair amount of volatility, with the bond ranging between 100 and 106p during the past year. However, what is evident is the degree by which this performance has lagged the bull market in gilts. At the mid-price of 104.95, the bond is offering an incremental yield of 4.5 per cent above gilts of an equivalent maturity.

There are other Provident Financial bonds trading in the market. Investors can choose from a range of issues, as follows:

1) The Provident Financial 7.5% 2016 (ISIN XS0605672558), last year's £50m issue on the LSE's ORB market. Offered at 105.75 in the market, the YTM is 6 per cent. The bond is available in minimum denominations of £100 and is Crest deliverable.

2) The Provident Financial 8% October 2019 (ISIN XS0459028626). This is a £250m institutionally-targeted bond launched in 2009. Offered at around 100, the bond offers the best value of the bunch with a YTM of 8 per cent. However, the minimum "piece" is £50,000, making the security non-viable for most private investors.

3) The Provident Financial 7% April 2020 (XS0496412064). This is an older retail bond with an issue size of £25m. Denominations are just £1 and the issue is Crest deliverable. The mid-price of 104.95 equates to a YTM of 6.2 per cent.

How easy will these be to buy? With secondary market bonds, liquidity typically comes and goes. Regarding dealing in these issues, both the retail bonds are fairly small in size, and as such offers may not always be available at good prices. Investors should check the price and adopt a take-it-or-leave-it stance.

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