The tale of alternative mortgage lender Home Capital Group Inc. (TSX:HCG) is something we’ll be talking about for a long time. It isn’t very often we witness a run on a bank.
Approximately a month ago, Home Capital had $2 billion deposited in high-interest savings accounts. As of Monday, just $391 million remained, with the balance shrinking every day.
To help shore up its balance sheet, Home Capital was forced to take out an emergency loan with the Healthcare of Ontario Pension Plan for $2 billion.
Shares have been in freefall. At the beginning of the year, Home Capital shares traded at $31 each. These days? Below $8 each.
Value investors have started sniffing around the stock, attracted to the company’s low price-to-book ratio, its history of growing profitability, and its succulent dividend yield, among other qualities. If it can pull itself out of the abyss, so to speak, there’s huge upside potential.
One thing is for certain; Home Capital’s succulent dividend yield is at risk, even though the payout looks to be on solid footing.
The company earned $3.71 per share in 2016, but there’s no way it can replicate that result in 2017. The $2-billion emergency loan comes with an interest rate of 15%. Home Capital collects approximately 4% from its borrowers. It just won’t work.
Home Capital is truly fighting for its life here. The last thing it needs is $16 million or so heading out the door each quarter. Thus, the dividend will be eliminated. It’s only a matter of time.
