Whereas evaluating price-to-earnings (P/E) ratios this morning, a lesser-known FTSE 250 inventory caught my consideration.

With a low P/E ratio of 8.8 and a meaty 5.6% dividend yield, I used to be intrigued. Both it’s a strong dividend inventory with sturdy earnings… or a crashing share price has pushed the yield up and the P/E down.

I needed to discover out.

A lender-turned-challenger financial institution

Paragon Banking Group (LSE: PAG) might seem to be the newest in an extended line of UK challenger banks. Nevertheless it’s removed from a brand new participant in the marketplace.

As soon as solely a buy-to-let (BTL) lender, Paragon obtained a UK banking license in 2014. It now serves over 1.5m clients with £15bn in loans.

Like most challenger banks, it differs from excessive road banks in that it has no branches. Quite than provide typical financial savings accounts, it focuses on specialised lending for landlords, SMEs and industrial gear.

CEO Nigel Terrington has helmed the financial institution for nearly 20 years, having initially helped it navigate the early 90s recession. Having held the place so lengthy speaks volumes to his dedication — however how has the financial institution fared in that point?

Gradual and regular progress

Surviving each the 90s recession and the 2008 Monetary Disaster, Paragon’s made regular progress. It’s up 77.6% prior to now decade, equating to annualised progress of 5.93%. It recovered quickly after Covid, climbing from £2.57 a share to a five-year excessive of £8.03 final month (6 December).

However previous efficiency is not any indication of future outcomes. If the housing market slips, mortgage lenders might take successful. Even mildly rising rates of interest might put important stress on the corporate’s income.

What’s extra, it’s dealing with up in opposition to the large boys like Lloyds and NatWest. Specialist lenders have a spot however the progress potential’s restricted. Throughout robust financial instances, customers are inclined to want established manufacturers over lesser-known ones.

What’s the choice?

When assessing a inventory, it’s equally vital to search for causes NOT to purchase it, somewhat than vice-versa. One of many key causes to not put money into one inventory is the potential to raised allocate capital elsewhere.

Trying on the UK’s diversified finance sector, one key competitor stands proud: OSB Group. Like Paragon, it provides BTL and industrial mortgages within the UK together with further companies like financial savings accounts.

Each share comparable market-caps (£1.5bn) and revenue margins (40-50%) however OSB enjoys significantly increased income and earnings. It additionally has a barely increased 10-year annualised progress price of 6.4%.

Most notably, OSB has a decrease P/E ratio (3.8) and a better dividend yield (8.3%). On condition that these have been my preliminary standards, it appears OSB’s the apparent selection. 

Nevertheless, the share price is down 20% prior to now six months resulting in the inflated yield. What’s extra, it has a brief dividend historical past, limiting any assurance of future funds.

Last ideas

Regardless of the decrease yield, Paragon could also be extra dependable for dividends. That mentioned, it provides fewer diversified merchandise, leaving it extra uncovered to the housing market.

General, with sturdy earnings progress and a historical past of secure administration, I feel it’s a inventory price contemplating. I’m not at the moment seeking to diversify extra into finance but it surely’s actually one I’ll regulate.