HOME CAPITAL GROUP INC. $43(Toronto symbol HCG; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 70.2 million; Market cap; $3.0 billion; Price-to-sales ratio: 5.2; Dividend yield: 2.0%; TSINetwork Rating: Average; www. homecapital.com) provides mortgages to borrowers who don’t meet the stricter standards of larger, traditional lenders, like banks. Clients include self-employed people and recent immigrants with limited credit histories.
Low interest rates continue to fuel mortgage demand. As a result, Home Capital’s revenue rose 47.6%, from $687.2 million in 2010 to $1.01 billion in 2014. Earnings jumped 86.4%, from $154.8 million to $288.4 million, while per-share profits gained 84.2%, from $2.22 to $4.09. In the first quarter of 2015, the company’s revenue rose 0.5%, to $249.2 million from $247.9 million a year earlier. Earnings gained 3.7%, to $72.3 million, or $1.03 a share, from $69.7 million, or $1.00.
Humans beat computers
Unlike regular banks, which rely on computers to evaluate risk, Home Capital’s employees investigate and verify borrowers’ financial information. This takes longer and costs more, but it helps the company identify problem loans early. It then uses this information to restructure a borrower’s repayment terms and adjust its lending policies.
In the latest quarter, Home Capital set aside $2.4 million to cover potential future loan losses, down 24.6% from $3.2 million a year earlier. The company ended the quarter with bad loans making up just 0.25% of the total, down from 0.33% a year earlier.
Home Capital’s efficiency ratio (non-interest expenses divided by revenue; the lower, the better) worsened to 30.4% from 28.5%. That’s mainly because it continues to expand its Oaken Financial business, which offers savings accounts and other banking products, mainly over the Internet.
Moving beyond mortgages
Oaken pays depositors higher interest than other banks, but its online-only structure keeps its costs low. Oaken’s deposits also cut Home Capital’s reliance on less stable forms of funding, like selling mortgages to third parties. Oaken’s deposits have jumped 227.1% in the past year, to $821.1 million.
Meanwhile, Home Capital continues to expand into other forms of lending. One example is its Equityline Visa credit cards, which let users tap into the equity they’ve built up in their homes. In the latest quarter, credit card loans rose 2.6% and accounted for 2% of Home Capital’s total loans.
Low p/e and higher payout range
Home Capital will likely earn $4.79 a share in 2015, and it trades at a low 9.0 times that forecast. The company also recently raised its dividend by 10.0%. The new annual rate of $0.88 a share yields 2.0%. Home Capital now plans to pay out 19% to 26% of its earnings as dividends, up from its earlier range of 14% to 21%.
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