HOME CAPITAL GROUP INC. $72 (Toronto symbol HCG; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 34.7 million; Market cap; $2.5 billion; Price-to-sales ratio: 2.2; Dividend yield: 1.6%; TSINetwork Rating: Average; www. homecapital.com) gets 90% of its revenue by making residential mortgage loans to borrowers who don’t meet the stricter standards of larger, traditional lenders, like banks. These clients include recent immigrants with limited credit histories and self-employed individuals.
The remaining 10% of Home Capital’s revenue mainly comes from credit cards and other loans to consumers and businesses.
Fixing loans before they go bad
Even though Home Capital caters to riskier borrowers, it avoids huge credit losses by identifying problem loans early. It then uses this information to restructure a borrower’s repayment terms and adjust its lending policies.
The company also cuts its risk by selling its mortgages to third parties. Moreover, Home Capital keeps its mortgage loans below 80% of a property’s market value.
Home Capital raises money for its loans through its six branches in major Canadian cities. These outlets offer traditional banking services, including savings accounts and retirement savings plans.
Thanks mainly to low interest rates, which continue to fuel loan demand, the company’s revenue jumped 95.2%, from $454.7 million in 2008 to $887.7 million in 2012. Earnings rose 103.8%, from $3.13 a share (or a total of $108.7 million) in 2008 to $6.38 a share (or $222.0 million) in 2012.
In the three months ended June 30, 2013, Home Capital’s earnings rose 16.3%, to $61.9 million, or $1.77 a share. A year earlier, it earned $53.2 million, or $1.54 a share. Revenue gained 6.3%, to $232.6 million from $218.8 million.
Loan quality remains high
Home Capital set aside $4.4 million to cover future loan losses in the latest quarter, up 92.7% from $2.3 million a year earlier. That’s mainly because the company is shifting toward more profitable traditional mortgages that are not insured by the Canada Mortgage and Housing Corp. Even after this jump, bad loans remained unchanged at just 0.31% of its total loans.
The company’s efficiency ratio (non-interest expenses divided by revenue—the lower, the better) worsened, to 28.6% from 27.8%. That’s because it hired more employees to handle rising loan demand, which pushed up its costs.
Long history of rising dividends
The company is more risky than Canada’s big five banks. However, the stock is attractive at just 9.9 times Home Capital’s likely 2013 earnings of $7.28 a share. The company has also increased its dividend 16 times in the past nine years. The current annual rate of $1.12 a share yields 1.6%.
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