Can FlexiGroup Limited’s deal with Flight Centre Travel Group Ltd see it take off?

The market received an interesting update this morning from out-of-favour businesses FlexiGroup Limited (ASX: FXL) and Flight Centre Travel Group Ltd (ASX: FLT). After a competitive process, Flight Centre will now offer interest-free finance to retail customers for their travel purchases through the brands Flight Centre, Travel Associates, Cruiseabout, Student Flights, and Escape Travel.

FlexiGroup will commit an initial $3 million this year in order to get the arrangement started, and there is an expectation that it could double Flexi’s card business revenues and profits over the next several years.

So What?

The agreement looks like a real coup for FlexiGroup, with interest free travel highly appealing in this age of increasing consumer debt. The partnership with Flight Centre provides a national distribution platform for the product with plenty of upside for FlexiGroup over the next few years as the fees start rolling in.

There’s also upside for Flight Centre because of the uniqueness of the offer (differentiating it from competitors) as well as increased volumes and the potential for eventual replication across its international network – with FlexiGroup responsible for the costs and the risks.

Now What?

Neither FlexiGroup nor Flight Centre look expensive today, although the deal is far more important and relevant to Flexi than it is to Flight Centre. The downside is it will potentially take some time to get volumes going and the nature of the offer requires heavy up-front investment from FlexiGroup (funding people’s holidays) which is then paid back plus fees gradually over a number of years.

There’s also a question over which customer segment interest-free travel will most appeal to. Students and young people are the ones that jump to mind but they’re not necessarily in the best position to take on large debt commitments. However, when you’re on a tight budget the appeal of small regular repayments as opposed to a lump sum rises exponentially.

I expect FlexiGroup to rise sharply today as the announcement looks like great news that adds a viable long-term growth avenue to FlexiGroup – and it won’t hurt Flight Centre’s offering either.

Investors love FlexiGroup and Flight Centre for their whopping dividends - 7.7% and 5% respectively, fully franked - but if you are interested in quality dividend shares, then I would recommend this top dividend share instead. A reliable 6.6% yield and potential share price gains make this a great investment idea in my opinion.

Our Top Dividend Stock for 2016

Our resident dividend expert names his Top Dividend Share for 2016. Not only are the shares dirt cheap, the company is trading on a fat fully franked dividend yield. Simply click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required!

What are you waiting for?

Motley Fool contributor Sean O'Neill owns shares of Flight Centre Travel Group Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.