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The Valuation of Dividend stocks. UK virgin money (LSE: VMUK) looks cheap in a number of ways.
For example, with the banking company’s share price close to 152 pence, the price-tangible book value is just below 0.4.
If the company were in any other line of business, that figure would likely be a big red flag that would demand investors’ attention. But who trusts the value of bank assets today after everything that has happened in the last two decades?
A spotty dividend record
However, that is not the only indicator. The expected dividend yield for the current business year to September 2024 is around 6.5%.
But one of the main considerations when evaluating dividend stocks is consistency. And in that sense, Virgin Money UK could do better.
The company completely suspended payment to shareholders during the pandemic, along with other banks. But the pause on Virgin’s dividends was long. There were no dividends in 2019 and 2020, with a token payment the following year.
To be fair, the directors authorized a larger total dividend for 2022 than seen before the pandemic. But today’s full-year results (November 23) show the total dividend for the year to September 2023 is down at 5.3 pence per share compared to 10 pence a year earlier.
But that’s not the whole story. The company also announced its intention to expand its ongoing share buyback program by £150 million.
Buybacks have been taking place in the company for some time. In theory, the process reduces the number of shares available. And that means that future profits and dividends will be distributed among fewer of them. Therefore, sometimes the share price can rise to accommodate the improved per share numbers.
Recovery and growth ahead?
The company’s focus on buybacks raises the intriguing possibility of an increase in the stock price from where it is now.
Meanwhile, the stock is at a level you seem to like! And today’s figures for the entire year don’t seem so bad to me. Although they do include a drop in underlying profit before tax of around 24%. But analysts had previously expected a profit cut somewhere in that range, given the difficult operating conditions for banks in the period.
There is a possibility of a recovery in the general economy in the future. And the company has the potential to obtain good results with its brands of Clydesdale Bank, Yorkshire Bank and virgin money in the coming months and years.
Looking ahead, CEO David Duffy said the underlying business momentum is “strong”. He believes the company’s drive toward greater efficiency will support a lower cost-to-income ratio and improve the company’s ability to compete in a rapidly changing digital marketplace.
Growth is on the agenda, without a doubt. And that’s why Virgin Money UK is probably not a value trap. But like all banks, it is a cyclical and highly financially oriented operation. And that situation adds an extra layer of risk for investors.
Overall, it seems like the business is now worth further research and consideration. But I’d keep the stock in check if I held it!
