Close Brothers dividends make a comeback

The ability of Close Brothers (CBG) to ride out the worst of the pandemic by taking part in the distribution of government-backed coronavirus business interruption loans (CBILS) was only part of the story behind the firm’s renewed ability to return to dividend growth.

If anything, the pandemic highlighted the virtue of effective diversification for financial services companies, and Close Brothers illustrated better than most how a broad spectrum of services can be effective in shielding the core business from the worst effects of a crisis. However, the full-year results opened the debate on where the company goes from here as the UK economy enters another significant bout of uncertainty.

Close Brothers’ business model rest on three pillars – banking, market-making and asset management. It was banking that led recovery in these results, while at the same time raising questions over how sustainable this growth will ultimately prove. Adjusted operating profit from lending more than doubled to £212m, including a £52m contribution from the commercial arm - a ten-fold rise on the prior period - as those CBILS flowed out into the economy. The net effect was an increase in the net interest margin to a respectable 7.7 per cent.

And here-in lies the paradox: in no one’s estimation is that performance likely to continue, which suggests that income growth is going to soften on a like-for-like basis from here, without management doing anything particularly wrong. As an example of the risk, of the £490m increase in the loan book for the year, £410m was related to CBILS. Meanwhile, other lenders have already noted weak demand for the follow-up Covid-19 recovery loans.  

Luckily, Close Brothers has other revenue streams that give it the stability that separate it from other lenders. For instance, the company’s position on both sides of the trade, as both a market maker and asset manager, means its captures more of the value chain when markets are brisk. The Winterflood broking business grew 27 per cent to £60.9m, while asset management adjusted profits were a respectable £23.7m - a 16 per cent rise on last year, powered by net fund inflows of around 7 per cent.

Broker Panmure Gordon's 2022 forecasts have the shares on a forward P/E multiple of 11.3 and the dividend yielding 4.2 per cent. That valuation places Close at a premium to the banks and a discount to the best of the asset managers. That is a decent price for a well-run business. Buy.

Last IC View: Buy, 1,617p, 16 Mar 2021