Usually, when a stock’s valuation drops to this level, it is a sign that something is wrong with the business, and the market is avoiding the company because it believes earnings are going to fall substantially.

We can’t predict the future, so at this stage, it is impossible to tell if this is the case, but based on what we know today, OneSavings is still expanding. 

Results show growth

According to the bank’s interim earnings report for the six months ended 30 June, underlying profit before tax increased 6% in the first half of 2019 to £96.9m. Underlying basic earnings per share increased 5% to 29p.

Even though the lender’s net interest margin — the difference between what it pays out to depositors and receives from lenders — declined from 301 basis points (bps) to 278bps year-on-year, the group was able to report an increase in profitability thanks to net loan book growth of 10% “driven by 13% growth in organic originations with high demand across our core market segments.“

Management doesn’t expect this trend to come to an end any time soon, even with Brexit on the horizon. “Despite ongoing uncertainty around Brexit,” the trading update notes, given the strong growth already achieved this year and the “current strong pipeline” of loan applications, the company expects to “deliver high-teens net loan book growth in 2019 at attractive margins.” 

Merger of equals

OneSavings’ management believes the company’s all-share merger with Charter Court Financial Services Group plc (LSE: CCFS), which received approval from shareholders at the end of July, will only bolster growth.

Charter and OneSavings both offer relatively similar credit products. They specialise in buy-to-let mortgages and specialist residential lending. Considering the growth in OneSavings’ loan book during the first half of 2019 looks as if the demand for these products is moving.

Charter also reported strong lending growth during the first half of the year. The company grew its loan book 23.8% to £7bn on originations of £1.5bn. Unfortunately, profits dipped slightly, from £93m to £83m for the six months ending 30 June, due to higher costs associated with the merger. 

Boost to growth 

While OneSavings’ takeover of its smaller rival still has to receive the green light from regulators, I think the deal will be an excellent outcome for shareholders of both businesses. By combining, the two challenger banks should be able to reduce operating costs, funding costs and improve efficiency, leading to overall increased profitability.

Right now, shares in both businesses are dealing at forward P/Es of less than six and support dividend yields of 5.2%. In my opinion, these multiples undervalue the companies and their prospects, and I would be quite happy to buy both of these FTSE 250 income stocks for my portfolio today.

The post I think these FTSE 250 dividend stocks yielding 5% are going cheap appeared first on The Twelfth Magpie.

More reading

• Here’s how much someone would need in a Stocks and Shares ISA to make £740 a month
• 6.8% yields! 2 UK shares to consider for a Stocks and Shares ISA?

Rupert Hargreaves owns no stock 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.

First of all, there was a merger between Virgin Money and CYBG. Then shares in Metro Bank, the first high-street bank to be granted a new banking licence for 150 years in 2010, plunged after it admitted a mistake in calculating the value of loans on its balance sheet. And now, challenger banks OneSavings (LSE: OSB) and Charter Court Financial (LSE: CCFS) have announced they are exploring a merger.

Banking tie-up

The OneSavings/Charter merger has been announced officially today. The initial proposal says that for each Charter share, holders will receive a 0.8253 chunk of a new OneSavings share which, when all said and done, will give Charter investors 45% of the combined group immediately after completion. 

Managers believe the deal will unlock £22m in annual pre-tax cost savings in the three years after the transaction. Around 30% of these cost savings are expected to be achieved in the first 12 months after a merger. 

The two banks, both of which specialise in lending to buy-to-let investors, should be able to use their enhanced size both to attract new customers and offer better deals to existing borrowers. They are already firing on all cylinders. Today, OneSavings reported a 15% increase in underlying profit before exceptional items to £193.6m for the full-year. Meanwhile, Charter announced a rise in pre-tax profit of 42% for the year ending 31 December 2018. A strong demand for buy-to-let and residential mortgages helped the company increase its loan book by 24% during the period, to £6.7bn.

Taking market share 

Using today’s numbers, when combined, OneSavings and Charter will have a loan book worth around £15.7bn. This is tiny in comparison to the UK’s largest banks, such as Lloyds (£444bn of loans and advances to customers outstanding at the end of 2018), but with the size of the loan book growing at 20%+ per annum, the combined group should quickly be able to scale up.

And when the deal is complete, I think shareholders will be well rewarded as both of these companies have plenty of scope to increase their cash returns to investors. 

Today, Charter announced its inaugural dividend of 12.7p per share, (on earnings per share of 50p) giving a dividend yield of 3.8%. OneSavings hiked its distribution to investors to 14.6p for the full year, (on earnings per share of 58p) giving a dividend yield of 3.7% at the time of writing.

Considering the fact that both companies have plenty of headroom to increase dividends by 100% or more without factoring cost synergies from the merger, I think there is a solid chance that the combined OneSavings and Charter could become one of the financial sector’s best income stocks — that’s without factoring in the explosive growth both firms are currently registering (as I have said before, based on its growth, I think OneSavings alone could be worth as much as 694p). That’s why I would buy these two FTSE 250 challenger banks today.

The post 2 FTSE 250 stocks yielding 4% I’d buy today appeared first on The Twelfth Magpie.

More reading

• Here’s how much someone would need in a Stocks and Shares ISA to make £740 a month
• 6.8% yields! 2 UK shares to consider for a Stocks and Shares ISA?

Rupert Hargreaves owns no share 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.