While the RBA decided to keep interest rates on hold at its most recent meeting, the outlook for monetary policy is still more dovish than hawkish. In other words, the RBA's next move seems more likely to be down rather than up, owing to an Aussie economy which has a highly uncertain outlook. And, with the future for the resources sector still being one of cutbacks rather than investment, it seems likely that aggregate demand within the domestic economy will remain relatively weak over the short to medium term.
As a result, Aussie investors may be feeling somewhat uneasy about the prospects for a number of sectors. However, the lending industry stands to benefit from a falling interest rate more than most, since it means that demand for new loans could increase and default rates stabilise. That's because the affordability of debt is likely to improve, thereby meaning the cost of servicing loans falls.
Looking ahead, lenders such as FlexiGroup Limited (ASX: FXL) and Australia and New Zealand Banking Group (ASX: ANZ) are forecast to post increases in their bottom lines of 9.4% and 3.8% respectively per annum during the next two years. Clearly, FlexiGroup's growth rate is much more impressive than that of ANZ and, in addition, it trades at a greater discount to the ASX than its larger peer. While ANZ's price to earnings (P/E) ratio of 11.2 is much lower than the ASX's rating of 16.2, FlexiGroup's P/E ratio of 9.9 indicates that there is vast scope for an upward rerating over the medium term.
Similarly, ANZ's dividend yield of 6% (fully franked) may be higher than FlexiGroup's yield of 5.7% (also fully franked), but the latter has much more enticing dividend growth prospects. For example, owing to its superior profit potential, FlexiGroup is expected to increase dividends per share at an annualised rate of 7.8% over the next two years, which compares favourably to ANZ's expected rise in shareholder payouts of 4.3% per annum during the same time period.
Furthermore, FlexiGroup has scope to increase them at an even faster rate due to its payout ratio standing at a rather modest 58%, which compares favourably to ANZ's payout ratio of 68%. This means that, even if FlexiGroup's profit growth does disappoint somewhat, it still has the ability to increase dividends so as to maintain above inflation growth in shareholder payouts.
Clearly, both stocks have excellent track records of growth and this should provide their investors with confidence regarding their respective strategies and long term performance potential. However, FlexiGroup again outperforms ANZ on this front, with its earnings per share rising at an annualised rate of 14.7% during the last five years, versus 9.5% per annum for ANZ.
So, while ANZ is an appealing buy at the present time, FlexiGroup appears to offer better value for money, improved income prospects, a more appealing track record, as well as a strong growth outlook. As such, it seems to be the better buy at the present time.
