Why I'd dump Provident Financial plc to buy this FTSE 100 growth stock

After 12 months of what can only be described as a turbulent period for Provident Financial(LSE: PFG), Neil Woodford (one of the company's top shareholders) recently stated that the business "is now on a stable recovery path" and that "the company's intrinsic value is substantially higher than the current share price would suggest."

Woodford even started buying more Provident at the end of February after the company announced a £300m rights issue and also agreed on a settlement with the FCA concerning an investigation into its Vanquis Bank arm, which was much lower than expected.

Vanquis is being forced to pay a £2m fine and nearly £170m in compensation to customers who had not been adequately informed about the full cost of an add-on product called the Repayment Option Plan.

Now that the company has put these issued behind it, market sentiment towards the business has changed drastically, and shares in the doorstep lender are currently trading 58% above their 52-week low of 426p per share.

More problems ahead?

Nonethless, despite Provident's recovery efforts, I'm not convinced that the firm is out of the woods just yet. Its troubles over the past year have dented its reputation and the decision to move staff to full-time contracts sparked an exodus to rivals, which have benefitted at Provident's expense. Trying to win employees, and their customer books, back is not going to be easy.

City analysts are expecting earnings per share to fall 80% to 55.3p for 2018, before recovering to 74p for 2019, but I'd like to see further progress from the company before trusting that it is on track to hit these forecasts. And the valuation isn't winning me over either. The shares currently trade at a forward P/E of 12.1, which is more expensive than FTSE 100 growth and income champion Direct Line(LSE: DLG).

FTSE 100 champion

Shares in Direct Line are currently trading at a forward P/E of 11.7 and analysts are expecting the company to pay a dividend to investors of 27.3p this year, giving a dividend yield of 7.3%.

Last time I covered Direct Line, I highlighted that one of the reasons why I like the personal and small business general insurer is its predictable cash flows, which support hefty shareholder payouts. This remains the case. For 2017 the company reported a 53% increase in profit before tax and with an adequate solvency ratio of 162%, management declared a 40% increase in the full-year dividend payout taking the total cash return to investors for the year to £486m -- that's just under 10% of Direct Line's total market value.

I believe management will continue to prioritise cash returns, underpinned by profit growth. The company is targeting a combined operating ratio -- a measure of insurance profitability -- of "93% to 95% over the medium term." A combined ratio below 100% indicates profitability. The group reported a ratio of 97.7% for 2016. Direct Line is planning to hit its profit goal by using data to assess clients better, reduce costs and use its prominent position in the market to attract new customers. If management reaches this target, then I believe shareholders will be well rewarded.

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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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