Home Capital Group: Is This 4.7% Dividend Safe?

Home Capital Group Inc. (TSX:HCG) is Canada’s largest alternate mortgage provider. Much of its business is issuing subprime loans to borrowers that won’t qualify for traditional loans at Canada’s major banks. 

Most of the company’s lending occurs in the Greater Toronto Area, which many pundits agree is in a housing bubble. The average home in Toronto has increased in value by more than 30% in the last year.

On the surface, Home Capital’s 4.7% dividend looks like the kind of thing dividend investors dream about. The current payout is $1.04 per share, each year. The company earned $3.71 per share in 2016. That gives us a payout ratio of just 28%.

You won’t find many dividends that high with a payout ratio under 30%.

But Home Capital has many problems once we dig deeper. The company is currently under investigation by the Ontario Securities Commission (OSC) stemming from a 2014/2015 incident where management admitted loans submitted by 45 mortgage brokers may have been approved based on false numbers.

Shortly after the OSC investigation was announced, Home Capital abruptly parted ways with its then-CEO, Martin Reid. The official reason was listed was Reid’s inability to grow mortgage originations, but many investors who are short Home Capital think the true reason was far more nefarious.

The stock price also seems to indicate something is seriously wrong. Shares have lost close to 40% of their value in the last year and nearly 30% since the start of the year.

The bottom line? Perhaps this succulent yield should be avoided. There are just too many question marks.