Paragon Group Cos, (PAG) a U.K. provider of mortgages to landlords, posted its biggest fall in nine weeks after analysts including Peter Lenardos at RBC Capital said its plan to increase dividends is too modest.
Paragon’s intention to target a payout of three times to 3.5 times earnings by 2016 represents a slow increase that will still be below the average for comparable companies, Lenardos said in a note today.
The stock declined 3.7 percent, the biggest drop since Sept. 18, to close 9.3 pence down at 240.7 pence. It was the worst performer in the FTSE 350 Financial Services Index. (F3OTHR) The volume of shares traded was more than three times the three- month daily average.
“The new dividend policy, while welcomed, is still conservative given the company’s excess cash position and ongoing cash generation,” Lenardos said. The payout this year represents a yield of 2.4 percent compared to an average of 4.7 percent for companies in the financial services index, he said.
The stock’s decline came even as Paragon reported pretax profit of 95.5 million pounds ($152 million) for the fiscal year ended Sept. 30, beating the average estimate of 92.6 million pounds from 12 analysts surveyed by Bloomberg. It paid a final dividend of 4.5 pence a share, compared with a Bloomberg estimate of 3 pence.
“There should be an expectation that dividend growth will exceed earnings growth until at least 2016,” Chief Executive Officer Nigel Terrington said in a telephone interview.
Paragon increased lending on new buy-to-let mortgages by 45 percent to 184.3 million pounds in the last fiscal year and expects to lift that further this year as more U.K. residents rent homes.
The proportion of households in England living in private rented accommodation in 2010-2011 rose to 16.5 percent, or 3.6 million households, the highest level since at least 1980, according to the English Housing Survey published in February.
Paragon has 500 million pounds available for lending, Terrington said. It spent 113 million pounds last year buying packages of loans from banks and is looking to invest a similar amount this year.
“The proportion of deals we are looking at is as big as it has ever been,” he said.
James Hamilton, an analyst at Numis Securities Ltd., cut his recommendation on the stock to sell from buy on the grounds that Paragon is a high-risk business with a return on equity of almost 9 percent that is “miles below” its cost of equity.
“The return to the highest risk area of lending, residential mortgages, is a concern,” Hamilton said in a note today. “The good news is that with their uncompetitive funding costs their market share is now minimal.”
Hamilton is the only analyst surveyed by Bloomberg with a sell rating on Paragon. One analyst has a neutral recommendation and 12 say investors should buy the stock.
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