Provident Financial plc (LON:PFG): What Does It Mean For Your Portfolio?
If you are a shareholder in Provident Financial plc’s (LSE:PFG), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. The beta measures PFG’s exposure to the wider market risk, which reflects changes in economic and political factors. Not every stock is exposed to the same level of market risk, and the market as a whole represents a beta of one. A stock with a beta greater than one is considered more sensitive to market-wide shocks compared to a stock that trades below the value of one.
View our latest analysis for Provident Financial
What is PFG’s market risk?
Provident Financial’s beta of 0.56 indicates that the company is less volatile relative to the diversified market portfolio. This means the stock is more defensive against the ups and downs of a stock market, moving by less than the entire market index in times of change. PFG’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.
How does PFG’s size and industry impact its risk?
A market capitalisation of UK£953.76M puts PFG in the category of small-cap stocks, which tends to possess higher beta than larger companies. Furthermore, the company operates in the consumer finance industry, which has been found to have high sensitivity to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the consumer finance industry, relative to those more well-established firms in a more defensive industry. It seems as though there is an inconsistency in risks portrayed by PFG’s size and industry relative to its actual beta value. There may be a more fundamental driver which can explain this inconsistency, which we will examine below.
How PFG’s assets could affect its beta
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I test PFG’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. Considering fixed assets is virtually non-existent in PFG’s operations, it has low dependency on fixed costs to generate revenue. Thus, we can expect PFG to be more stable in the face of market movements, relative to its peers of similar size but with a higher portion of fixed assets on their books. Similarly, PFG’s beta value conveys the same message.
What this means for you:
You could benefit from lower risk during times of economic decline by holding onto PFG. Its low fixed cost also means that, in terms of operating leverage, it is relatively flexible during times of economic downturns. In order to fully understand whether PFG is a good investment for you, we also need to consider important company-specific fundamentals such as Provident Financial’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
Future Outlook: What are well-informed industry analysts predicting for PFG’s future growth? Take a look at our free research report of analyst consensus for PFG’s outlook.
Past Track Record: Has PFG been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of PFG’s historicals for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
