Since the Coombs family launched S&U in 1938, they have shown an astonishing capacity for survival. Starting with a shop in Birmingham, they rode the trend for department stores in the 1950s and 1960s, then went into furniture and women’s fashions and made men’s raincoats before getting out of shops altogether in 1975 to concentrate on consumer finance.
They were in and out of doorstep lending before turning to motor finance and, seven years ago, property bridging loans. Latest challenge: the Court of Appeal’s motor finance mis-selling decision on October 25, which is casting a shadow over the entire industry.
• How one man’s £1.6k court case could cost car finance firms £13bn
An investment in S&U is a bet on the continuing ability of the Coombs dynasty, which still owns a 60 per cent stake, to anticipate the public’s spending patterns. That is likely to be tested as never before in the next few years, particularly in the car trade. Electric and, eventually, self-drive vehicles have the potential to upend the existing ownership profile, possibly challenging the longstanding default position of individuals and families possessing their own motors.
The company’s current place in the lending spectrum is what it calls non-prime, above the bottom-scraping riskiest subprime but well below the quality and reliability of borrowers that mainstream banks like. That justifies higher interest rates but incurs more bad debts. S&U’s slogan, “the credit you deserve”, is distinctly double-edged.
October’s half-year results showed net group receivables up from £417.3 million a year ago to a record £475.4 million, lifting revenue from £55.3 million to £60.4 million but higher finance costs and a near-tripled £18.1 million impairment charge at Advantage Finance, the motor division, took the division’s £19.1 million profit down to £9.4 million. As Advantage accounted for 81 per cent of total revenue, it was no surprise that it reduced group pre-tax profits from £21.4 million to £12.8 million. Revenue at Aspen, the bridging loan operation, rose from £7.9 million to £11.2 million, boosting its pre-tax profit by £1 million to £3.4 million. Net receivables were £45 million higher at £149.3 million, and repayments and recoveries rose by £6 million to £72.8 million.
The chairman, Anthony Coombs, said that the motor finance slowdown reflected “a temporary adjustment to shifting market dynamics and evolving regulatory expectations”. Some of the firm’s debt collectors had been adjudged too tough, resulting in an across-the-board tightening of collection processes. Although a Financial Conduct Authority investigation suppressed sales and collections, however, loan applications have rebounded by 22 per cent and the regulator has formally relaxed its grip.
This corner of the financial world is prone to sales practices that can occasionally challenge the boundaries of acceptability. The FCA had hung over S&U shares for the past year or so before the court case, in which the company was not directly involved. The judges found, however, that finance arrangements were illegal unless the commission fee had been fully disclosed. The Treasury is holding urgent talks over the fallout.
In a remarkable turnaround by Coombs, a former hardline Tory MP, he praised the incoming Labour government for delivering “greater political stability and a pro-growth and investability agenda”, with the hope that this may lead to “a greater emphasis on sensible access to credit for working people and their families, who are currently under-served by financial institutions”. The new administration’s commitment to a geared-up housebuilding programme will undoubtedly help S&U’s burgeoning bridging finance side.
“As negotiations with the Financial Conduct Authority conclude, this hiatus in performance is expected to prove temporary and a rebound anticipated for 2025,” Coombs added. “S&U’s dividend policy and strategic plans reflect our determined optimism.” That optimism may be about to be tested, however, and figures for the second half-year, to the end of January, should tell us more.
The first interim dividend was clipped from 35p to 30p. A same-again 120p dividend was pencilled in for this year, making a 7.2 per cent yield, but that is now in doubt. The shares recovered to touch £19.20 in October before plunging to £16.45 on Monday. They should be allowed to settle.
ADVICE Avoid
WHY Clarification needed on the impact of the court case
M&G Credit Income Investment Trust
Post-budget it looks as if interest rates are going to fall more slowly than was expected. Bad news? Not if you are lending.
M&G’s Credit Income Investment Trust aims at dividend yields of 4 per cent plus Sonia, the Bank of England’s sterling overnight index average rate, currently 4.95 per cent. It does that by investing in a mix of public and private debt. A 9 per cent dividend yield is usually a red flag in the equity market, but not in this case.
The fund has about 130 holdings — mainly illiquid loans held to maturity — made to firms ranging from banks and property to restaurants and shops, trucking and delivery. Between 70 per cent and 80 per cent of the total is floating-rate debt, where income rises or falls in line with UK interest rates.
The trust’s manager, Adam English, who has been overseeing bonds for M&G since 1999, said: “By investing in these specialised areas of fixed income, we can construct an investment-grade portfolio with the potential to produce superior income to traditional bond portfolios without compromising on credit quality, sourcing deals unavailable to other asset managers.”
Nevertheless, the top three holdings are other M&G funds: European Loan, Senior Asset Backed Credit and Lion Credit Opportunity, adding up to 22.25 per cent of the total investment.
The trust reduces risk when credit is expensive, adding risk when it is cheaper. In the crisis brought on by Liz Truss’s mini-budget two years ago the fund bought low, making useful profits. But forget juicy capital gains: since 2020 the shares have fluttered between 85p and 101p.
This year the trust is paying three quarterly dividends of 2.15p a share, and a fourth of 2.14p, making 8.58p. At a 95p share price, that is a 9.03 per cent yield.
English said in September that the company’s dividend target would remain “in the high single digits for the foreseeable future”. Last week’s budget has made that forecast even more secure, as yields rose and fewer bank rate cuts are expected next year.
ADVICE Buy
WHY Reliable income in an uncertain interest rate climate