Provident Financial commits to higher proportional dividend payout

Provident Financial (PFG) revealed a 12p final dividend for 2021, a year in which it returned to profit and closed its doorstep lending business. The focus is now on “mid-cost credit” products, after it closed its consumer credit division (CCD) in the wake of a claims mismanagement scandal involving the sale of unaffordable loans to borrowers. The closure resulted in a loss of £95.5m contained within discontinued assets. The CCD closure also resulted in an additional charge of £42.6mn for exceptional items. Overall, the lender booked an adjusted profit of £4.1mn against a loss of £114m in the prior year in part because last year's "more benign macroeconomic conditions" allowed for the release of some provisions made in 2020.

Presumably, the refocused group will have a lower risk profile, perhaps at the expense of gross margins, although it will be difficult to interpret whether this will play out with interest rates on the rise. This could be doubly significant given that the credit cards operation is now the primary driver of profits. Financial performance in this area was boosted by reduced impairments, with the rate coming in at 0.3 per cent, against 19.3 per cent in 2020. However, new customer bookings were down year on year, a reflection of tighter underwriting criteria in response to the pandemic.

FactSet consensus implies a forward dividend yield of 4.6 per cent, as management has committed to paying a higher proportion of dividends to adjusted profits. A forward PE multiple of eight times isn’t overly demanding, but it is difficult to say what net impact the cost-of-living crisis and rising interest rates will have on lending volumes in the UK economy, even though lower income households could conceivably rely on credit to a greater degree. Hold.

Last IC View: Hold, 184p, 15 Mar 2021