Equitable Group

On my other blog I am today writing about recessions ...continue...

I do not own this stock Equitable Group (TSX-EQB, OTC-EQGPF). I had read a glowing report on investing in this company, so I decided to check it out. It was interesting as it was loaning money to new immigrants, a class of people who generally have a difficult time getting loans and mortgages from our regular banks. It sounded intriguing.

By first brush through with company was concerning dividends. This showed me that the dividend yield is low currently at 1.26%. Over the past 5 years the dividends have increased at the rate of 4.6% per year, which is moderate. Although the dividend increase for 2012 was quite good at 16.7%, the dividend increase for 2013 is just 7.1%.

The problem I have with this stock is the low dividend yield and moderate dividend increases. If you purchased this stock today, and if the dividend increases stayed at 7.1%, which is the latest increase, then in 10 years' time you would only be getting a yield of 2.51% on your investment and in 15 years' time 3.53%. I think this is too little reward for the risks you take.

Compare this to says, the Bank of Nova Scotia (TSX-BNS) where the current dividend is 3.93% and the last increase was at 9.6%. In 10 years' time a current investment with these values would have a yield of 9.82% and in 15 years' time a yield of 15.53%.

To see if I can find anything else on this stock, I looked at the closing prices since the company went public in 2004. The total return over the past 5 and 9 years to the end of 2012 is acceptable, but not great. The total return over the past 5 and 10 years was at 3.98% and 4.28% per year with 1.40 and 1.41% per year from dividends and 2.58% and 3.88% per year from capital gains.

Why not compare this to another bank and again I looked at BNS which over the past 5 and 10 years to the end of 2012 and it has a total return of 6.47% and 12.36% per year with 3.76% and 4.25% per year from dividends and 2.71% and 8.12% per year from capital gains. This is not a favorable comparison as I will think that the risk in this stock is much higher than the risk of BNS stocks.

This company has a lot of cash on hand. Cash and Equivalent at the end of June 2013 was $417M which translates into some $27.48 per share or 58% of the current price of $47.50. Cash at the end of 2011 and 2012 was also high.

The ROE for 2012 is 16.2% and the ROA is 0.7%. For BNS for the same period the ROE is 15.6% and the ROA is 1%. Not much difference. The whole point to going to a riskier stock is better returns.

When I look at analysts' recommendations I find Strong Buy, Buy and Hold recommendations, with the consensus recommendation be a Buy. The consensus stock price is $49.70. This implies a 5.89% return with 4.63% from capital gains and 1.26% from dividends.

I took a look at this stock and the returns do not justify the risk. I did not complete my spreadsheet because I am not interested in this stock at this time. See my spreadsheet at eqb.htm.

Equitable Group Inc. is a niche mortgage lender. The company's primary business is first charge mortgage financing, which offer through company's wholly owned subsidiary, Equitable Bank (formerly The Equitable Trust Company). Equitable Bank is a Schedule I bank pursuant to the Bank Act, it actively originates mortgages across Canada and serves single family, small & large commercial borrowers. Its web site is here Equitable Group.

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 or StockTwits.