- Specialist lender records third straight drop in annual profits
- Annual dividend decreases for second consecutive year
- Lower interest rates and conclusion to FCA motor finance inquiry both potential positives going forward
- Shares trade no higher than in 2013 – but also below net asset value
“An increase in loan impairments, higher interest rates and regulatory pressure have all taken a toll on profits at specialist lender S&U, which has also cut its annual dividend payment for the second year in a row,” says AJ Bell investment director Russ Mould.
“This combination leaves the shares no higher than they were in 2013 and investors are clearly awaiting a resolution to the Financial Conduct Authority’s investigation and the Supreme Court’s appeal case decision before they take a view, even though the company has a fine long-term dividend record, and the stock looks cheap on most metrics.
“The FCA’s inquiries regarding discretionary commission arrangements (DCAs) in the motor finance market continue to cast a black cloud.
“The case relates to allegations of the mis-selling of DCAs, whereby some lenders allowed brokers and loan arrangers to adjust the interest rate offered to customers for car finance.
“The higher the rate, the more commission the broker earned. The FCA banned this in 2021, but it has received complaints from consumers who feel they were overcharged before this cut-off point. The regulator has investigated the period 2007-21 to see if finance providers acted unfairly and customers did indeed lose out and the Financial Ombudsman Service (FOS) has responded to customer complaints.
“The FOS argued that dealers and lenders did not fully disclose the DCAs and that customers potentially lost out as a result. Last December High Court argued that the FOS was correct in its interpretation of the 1974 Consumer Credit Act and dismissed the appeal from Barclays Partner Finance.
“Finance providers vigorously deny any wrongdoing. The FCA has paused action on any complaints regarding DCAs until 4 December 2025 and everyone – consumers, lenders, regulators and politicians – are now awaiting a decision from the Supreme Court on a further appeal from the lenders, this time Close Brothers and MotoNovo, who wish to prove they did not mis-sell car finance to the detriment of consumers.
“S&U’s Advantage Finance arm, a specialist in car loans has already acknowledged that a handful of cases, relative to the overall customer base, has attracted regulatory scrutiny.
“The company has acted and incurred costs as it has revised documentation, adopted voluntary restrictions and changed some business practices to ensure that customers continue to get the best possible outcomes.
“It has also seen a dip in lending and collections and an increase in arrears at Advantage, and thus impairment charges, as consumers have awaited the regulatory and legal findings. Advantage’s receivables fell by 15% in the year to January 2025 while volumes and pre-tax income at the operation fell by more than 40% in each instance.
“However, property finance specialist Aspen Bridging took up some of the slack. The loan book grew by a quarter to a record £179 million and collections did the same, to suggest that Aspen may be tapping into a sweet spot in the market, namely property refurbishment and newbuild for rentals in the residential market.
“Overall, receivables fell 6% year-on-year.
Source: Company accounts. Financial year to January.
“This helps to explain the drop in annual profits, alongside the increase in loan impairments, which almost reached the levels seen during the first year of Covid-19, such has been the impact upon the car financing market and consumer behaviour.
Source: Company accounts. Financial year to January.
“Analysts do believe that pre-tax profits will bounce back in the year to January 2026 once the Court makes its decision and the regulator concludes its report, but the share price suggests that investors are waiting to see it before they believe it.
Source: Company accounts, Marketscreener, consensus analysts’ forecasts. Financial year to January.
“S&U has reduced the size of the payment for all three of the dividends that it traditionally pays during its financial year – an interim in November, one further interim in March and then a final payment in July – to suggest it feels prudence is the best option for the moment. Analysts believe the total payment for fiscal 2026 could recover to 114p a share from the 100p declared for the year to January 2025.
Source: Company accounts. Financial year to January.
“The final 30p-a-share payment for fiscal 2025, though down from 50p a year ago, still takes the total in dividends paid to £12.04 in the last ten years – equivalent to 87% of the current share price.
“This, coupled with a historic price earnings ratio of 9.5 and a historic dividend yield of 7%, could persuade patient portfolio builders that there is some value to be had here, unless the current legal and regulatory inquiries totally break the business model, which seems unlikely given the service the firm provides and the government’s call for a practical solution to the appeal case, which may offer redress but also ensure that credit goes where it is needed to help keep the economy ticking over.
“The big banks tend to avoid this market, and S&U’s track record suggests it manages risk in a disciplined manner, as you would expect of a company that dates to 1938 and can point to three generations of management by the founding family, which still has a major shareholding.
“Investors clearly remain sceptical, though, as the current stock market capitalisation of £169 million stands well below the company’s net asset value of £238 million. The bulk of the assets are customer receivables, so that may reflect concerns over future possible impairments, but such a large gap does suggest a lot of bad news is already in the share price, pending the Supreme Court’s decision.”
