Why I’d still buy this Neil Woodford dividend stock despite today’s big share price fall

The star fund manager loves this big yielding stock. Despite today’s events, so does Paul Summers.

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Having recently endured heavy criticism for some of his stock picks, star fund manager Neil Woodford must have been fairly pleased with the performance of home collected credit lender Morses Club (LSE: MCL) before today. Occupying a position in his Income Focus fund, the stock was up 20% since the start of the year.

While news that payday lender Wonga is on the brink of collapse following a huge rise in compensation claims has stolen away a huge chunk of this gain, I continue to agree that the stock is a great option for dividend hunters.

Bumper yield

Performance over the 26 weeks to 25 August has been “strong” and in line with expectations, with the amount of credit issued by the small-cap up 4.3% to £85.7m. The company’s gross loan book increased 6.1% while its cashless lending product — the Morses Club Card — is proving increasingly popular with more than 27,000 customers and £13.1m of loan balances on the cards. The overall number of customers remained steady at 229,000.

A beneficiary of Provident Financial’s struggles, Morses revealed that new members of staff had now been “successfully integrated” and that territory builds were now “more normalised” following attempts to steal market share in the previous financial year. Personally, I regard its decision to prioritise the quality of its agents over just chasing new customers rather reassuring given the government’s new-found desire to punish those engaged in irresponsible lending. 

Commenting on results, CEO Paul Smith reflected that management was “confident” on the outlook for the remainder of the financial year and “positive” on opportunities available to Morses Club going forward.

Perhaps the biggest draw for investors, however, is the dividend. An expected 7.6p per share payout in 2018/19 translated to a near 5% yield before today, covered 1.7 times by profits. With the stock now a whole lot cheaper than it was, I think this could be a great opportunity for prospective owners.

Growth potential

Also reporting today was industry peer Amigo Holdings (LSE: AMGO). Hailing a “strong start” to its financial year, the newly-listed firm saw revenue jump 47% to £62.9m in the quarter to the end of June. At £21.8m, adjusted pre-tax profit was 31% higher. 

Offering a single guarantor loan product to those unable to get finance from traditional providers (a concept far more likely to appease regulators), Amigo’s net loan book stood at a little over £638m by the end of the reporting period — a 37% increase year-on-year. 

According to CEO Glen Crawford, the 13-year-old £1.4bn cap has “significant growth potential” in the UK and — with a commanding 88% of the market — already occupies “an unrivalled first mover position” in the mid-cost credit segment.

Unfortunately, all this good news appears to have been overshadowed by the debacle over at Wonga with Amigo’s stock down by over 7% in early trading. While some may wish to take advantage, I’d probably continue to favour Morses Club for now. 

Priced at 13 times forecast earnings before the markets opened, the shares were more expensive than those of its peer. Moreover, an expected 5.62p per share dividend for the current financial year equated to a yield of just under 2% — far lower than that offered by the Woodford-backed stock. 

It’s early days, of course. With the consequences of our EU exit for the UK economy (and ultimately our personal finances) still unclear, however, Amigo goes on my watchlist.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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