Shares in Barclays don’t tempt me even after the recent plunge. The share price has been moving broadly sideways for around 11 years. I fear an even bigger move down at some point in the future, perhaps caused by a plunge in earnings and a shrinking dividend.
Indeed, banking businesses are cyclical to their cores, and several years of high earnings in the sector are making me nervous. Instead, I’m keen on H&T (LSE: HAT), which earns its living in the wider financial sector from pawnbroking and other services.
Great figures
The share price is perky this morning, up around 10% as I write, on the release of the full-year results report. And the figures are good. Revenue rose by 12% compared to the prior year and diluted earnings per share shot up by 48%. The directors pushed up the total dividend for the year by 6.4%.
Since 2014, the company has a fine record of dividend growth, which has been backed by generally rising revenue and earnings. Meanwhile, two acquisitions during 2019 have helped push the store count from 182 up to 252.
Chief executive John Nichols explains in the report the new assets have combined with a “strong” core operating performance and a “beneficial” gold price to produce an “exceptional” trading performance during the year.
The price of gold is important to the firm because of its purchasing activities. H&T buys jewellery directly from customers through its stores and sells some of the gold for scrap. And it refurbishes some of the items it buys along with some that customers have forfeited from the pawnbroking pledge book. The company then sells these in its stores, along with a small amount of new or second-hand jewellery it purchases from third parties.
The firm’s pawnbroking activities involve securing loans to customers against collateral, known as the pledge. And more than 99% of the collateral offered by customers tends to be mainly gold, along with other precious metals, diamonds and watches. Like a bank, a pawnbroker such as H&T earns income on the interest charged on the loan secured by a pledged item.
Expansion going well
The company’s acquisitive and organic expansion is going well. The almost 39% increase in the pledge book over the period demonstrates that. Nichols reckons H&T’s “growing momentum” demonstrates the success of the firm’s strategy as well as ongoing strong demand for pawnbroking and related products. The outlook is positive, although he’s “mindful” of current macro uncertainties.
And in today’s world, it’s difficult for me to imagine the need for pawnbroking services ever receding. I like the way H&T appears to be aiming to consolidate the sector and see it as a survivor in these tough economic times.
Meanwhile, with the share price close to 336p, the forward-looking earnings multiple for 2020 sits just below seven. And the anticipated dividend yield is a smidgeon above 4.3%. I reckon the valuation is attractive.
