HOME CAPITAL GROUP INC. $55 (Toronto symbol HCG; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 70.1 million; Market cap; $3.9 billion; Price-to-sales ratio: 4.0; Dividend yield: 1.3%; TSINetwork Rating: Average; www. homecapital.com) gets 90% of its revenue by offering 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.
The remaining 10% of its revenue mainly comes from credit cards and other loans to consumers and businesses.
Today’s low interest rates continue to fuel strong real estate sales, particularly in cities like Toronto and Vancouver. However, a rate increase would undoubtedly slow sales—and mortgage demand. A sudden drop in home prices could also force some borrowers to stop repaying their loans.
Home Capital keeps its credit losses down by identifying problem loans early. It then uses this information to restructure a borrower’s repayment terms and adjust its lending policies.
In the quarter ended June 30, 2014, the company’s revenue rose 9.8%, to $255.5 million from $232.6 million a year earlier. Earnings gained 19.8%, to $73.7 million, or $1.05 a share, from $61.6 million, or $0.88.
In the latest quarter, Home Capital set aside $3.2 million to cover potential future loan losses, down 27.0% from $4.4 million. As of June 30, 2014, bad loans were just 0.32% of its total loans, down from 0.35% a year earlier.
The company’s efficiency ratio (non-interest expenses divided by revenue—the lower, the better) also improved to 28.3% from 28.6%. That’s partly because it recently launched Oaken Financial, which offers savings accounts and other banking products, mainly over the Internet.
Online banking is cheaper than operating branches. As well, Oaken is helping Home Capital attract more depositors, which cuts its reliance on less-stable forms of funding, such as selling mortgages to third parties.
The stock has jumped 70% in the past year. Even so, it trades at a low 13.0 times the $4.23 a share the company will likely earn in 2014.
The company just raised its dividend by 12.5%. The new annual rate of $0.72 a share yields 1.3%. Home Capital now plans to pay out 14% to 21% of its earnings as dividends, up from its earlier range of 13% to 17.5%.
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