Home Capital Group Inc.'s comeback went into high gear as a rebounding housing market and lower funding costs sent its earnings soaring just two years after the company plunged into financial crisis.
The mortgage lender’s shares surged more than 14 per cent on Wednesday, their biggest rally in about a year, after quarterly financial results came in well above expectations, leaving analysts wondering whether the Toronto-based company will resume paying a dividend.
The Toronto company, which specializes in underwriting mortgages for self-employed business owners and new Canadians who lack a credit history, said profits on a per-share basis surged 63.4 per cent in the third quarter.
So far this year, the stock has rallied 136 per cent. The remarkable gains reflect that the market has become much more comfortable with the company after it flirted with insolvency in 2017, and briefly became a red flag for Canada’s housing market among some short sellers.
“Today, we have all the elements in place for sustainable value creation,” Yousry Bissada, Home Capital’s chief executive, said in a call with analysts, pointing to upbeat economic conditions including low interest rates and strong employment figures.
The company’s financial results showed growth in the most important part of its business: Single-family mortgage originations increased 16.8 per cent, year-over-year, reflecting a pick-up in sales in its core Greater Toronto Area market.
At the same time, credit quality was stable and quarterly profit easily surpassed analysts’ expectations. Net income for the third quarter ended Sept. 30 was $39-million, or 67 cents a share, up from $32.6-million, or 41 cents, in the same period last year.
Ignoring a one-time technology investment, adjusted earnings were 72 cents a share. That was well above the 58 cents that analysts had been expecting, on average.
Demand for non-prime mortgages remains strong, even after regulators recently tightened lending rules to cool overheated housing markets in Vancouver and Toronto.
But Home Capital is also benefiting from lower funding costs. With bond yields well below their recent multiyear highs in 2018, the company can offer lower yields on its guaranteed investment certificates (GICs) offered at its Oaken Financial channel, boosting its margins on loans.
“We were paying more than 3.3 per cent for new money in December. And we’re seeing it around 2.5 per cent now,” Brad Kotush, Home Capital’s chief financial officer, said in a call with analysts.
The shares closed in Toronto at $33.15, up $4.15 or 14.3 per cent – a near sixfold increase over the stock’s low in 2017, just before the company was saved by the deep pockets and wily instincts of Warren Buffett, who bought a significant stake in the company and offered a financial lifeline. Mr. Buffett sold most of his stake in Home Capital in December, 2018.
The missing element from Home Capital’s return to form: a dividend. The company cut its quarterly payout from 26 cents a share to zero in 2017, and hasn’t reinstated any payout since then.
Instead, Home Capital has been rewarding investors with aggressive share buybacks, which reduces the number of outstanding shares and raises earnings on a per-share basis.
Over the past 12 months, the company has bought back $394-million worth of shares at a weighted average price of $17.19. That’s a 40-per-cent discount to book value per share in the third quarter, and suggests that the company is buying its shares at a bargain price. On Wednesday, it announced its intention to buy back another $150-million worth of shares in the first quarter of 2020.
But after Wednesday’s rally, the stock is now trading above book value for the first time in about three years, which suggests that the stock isn’t the bargain it once was. It also raises the question of whether the company will turn to dividends as an alternative way to return capital to shareholders.
“We continually review that with our board every quarter,” Mr. Kotush responded when asked about the dividend by an analyst from RBC Dominion Securities.
Mr. Kotush added that the next update on its dividend policy would follow the company’s fourth-quarter results, which are expected in February.
Despite the vague response from the CFO, some analysts expect that a dividend is coming: “While we are surprised that Home Capital did not reinstate its dividend, we continue to believe that it will do so in 2020,” Andrew Hood, an analyst at M Partners, said in a note.