Earnings: is Virgin Money UK a dividend stock to buy or a value trap?

The valuation of dividend stock Virgin Money UK (LSE: VMUK) looks cheap on several measures.

For example, with the banking company’s share price near 152p, the price-to-tangible book value is running just below 0.4.

If the firm was in any other line of business, that figure would probably be a big green flag demanding investors’ attention. But who trusts the value of bank assets these days after all that’s happened over the past couple of decades?

A patchy dividend record

However, that’s not the only indicator. The forward-looking dividend yield for the current trading year to September 2024 is around 6.5%. 

But one of the primary considerations when appraising dividend stocks is consistency. And on that score, Virgin Money UK could do better.

The company stopped the shareholder payment altogether during the pandemic, along with other banks. But Virgin’s dividend hiatus was long. There were zero dividends in 2019 and 2020, with a token payment the year after.

In fairness, the directors authorised a bigger total dividend for 2022 than had been seen prior to the pandemic. But the full-year results today (23 November) show that the total dividend for the year to September 2023 is lower at 5.3p per share compared to 10p the prior year.

But that’s not the whole story. The company also announced its intention to extend its ongoing share buyback programme by £150m.

Buybacks have been going on at the firm for some time. In theory, the process reduces the number of shares available. And that means earnings and dividends in the future are distributed over fewer of them. So sometimes the share price can move higher to accommodate the improved per-share figures.

Recovery and growth ahead?

The company’s focus on buybacks does raise the intriguing possibility of a boost to the share price from where it is now.

Meanwhile, the stock is sitting at a level it seems to like! And todays full-year figures don’t look too bad, to me. Although they do include a drop in underlying profit before tax of about 24%. But analysts previously expected an easing of profits somewhere in that ballpark given the tough operational conditions for banks in the period.

There’s the possibility of a recovering general economy ahead. And the company has the potential to do well with its brands of Clydesdale Bank, Yorkshire Bank and Virgin Money in the coming months and years.

Looking forward, chief executive David Duffy said underlying business momentum is “strong”. He thinks the firm’s drive for greater efficiency will support a lower cost/income ratio and enhance the company’s ability to compete in fast-changing digital marketplace.

Growth is on the agenda, for sure. And because of that, Virgin money UK probably isn’t a value trap. But like all banks, it’s a highly financially geared and cyclical operation. And that situation adds an extra layer of risk for investors.

On balance, the business looks like it’s worth additional research and consideration now. But I’d keep the stock on a tight leash if I held it!