Wednesday, January 25, 2012

Home Capital Group

I do not own this stock (TSX-HCG). This stock falls into the financial category and it is one financial that has done well though our recent problems. This company has a rather low dividend, but it increases at a very fast clip. The 5 year median dividend yield is 1.51, however, the 5 and 10 year growth in dividends is 23% and 31%. However, the dividend increases have been falling lately, with the last one in 2011 at just 11%.

The Dividend Payout Ratios are correspondingly low at a 5 year median rate of 14% for both earnings and cash flow. Total returns over the past 5 and 10 years have been at around 9% and 26% per year. The portion attributable to dividends would be around 1.5% to 1.8% over the past 5 and 10 years. The 10 year figure is higher for dividend, because the growth in dividend over the past 10 years was much faster than over the past 5 years.

Outside of known dividend and stock price for 2011, I am using the last annual statements of Dec 2010 to commend on other growth. For this company it has been increasing its revenues quite fast also, with revenue per share up 16.6% and 20.5% per year over the past 5 and 10 years. Their revenues so far this year have beaten last year’s revenue.

Cash Flow growth is also good, with the 5 and 10 years at 20% and 22% per year. Book Value has also grown well at 27% and 29% per year over the past 5 and 10 years. With the change in accounting rules to IFRS, book value has come down, but less than 2%.

Current Asset/Liability Ratios at 1.04 is rather typical of financial companies, as is the current Leverage and Debt/Equity Ratios of 10.39 and 9.39. These last two ratios have been coming down recently as their 5 year median values are 14.52 and 13.52 which is good. However, the Asset/Liability Ratio has recently gone down from a 5 year median value of 1.08 and this is not so good.

Over the past year there has been $6.5M of insider selling and a minimal amount of insider buying. Selling has been by CEO, officers and directors (not CFO). Both the CEO and directors have more shares than options. It is only the CFO and officers that have more options and both also have little in the way of shares.

Some 59 institutions own some 27% of the outstanding shares. Over the past 3 months they have marginally increased their holdings (by less than 2%).

When I look at analysts’ recommendations, I find Strong Buy, Buy and Hold. The overwhelming recommendation is a Buy and that is the consensus. This buy comes with a 12 months stock price of $63.89. Many analysts feel that this is a well-run company. However, please note that they do have some uninsured mortgages (sub-prime mortgages).

This stock has always had rather low Price/Earnings Ratios. The 5 year median low and high P/E ratios are 7.44 and 10.78. The current P/E of 8.3 is between the median P/E and low P/E ratios. I get a Graham Price of 54.91 and the current stock price of $52.77 is some 4% lower. The median difference between the Graham Price and stock price is the stock price being some 23% higher.

I get a 10 year median Price/Book Value Ratio of 3.44 and a current one of 2.33, which is some 68% lower. The current dividend yield of 1.52 is just above the 5 year median of 1.51. However, this dividend yield has been lower in the past with a 10 year median dividend yield of just 1.05%. All of these tests except the last one point to a very good price. The last one points to a reasonable price.

To me this looks like a good stock to hold. The reason I do not is because I already have too much invested in financials at the present time. I will not be selling most of my financial, especially my life insurance ones as I expect them to recover very well over the longer term. At some point I will have too much in banks and life insurance companies when these areas recover. So, I might consider selling some other financials in the future and maybe take another look at this one.

Home Capital Group Inc. operates through one subsidiary, Home Trust Company, to provide mortgage lending, deposit, retail credit and credit card issuing services. They have subprime mortgages. Its stock is widely held. Its web site is here Metro. See my spreadsheet at hcg.htm.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on twitter.

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