HOME CAPITAL GROUP INC. $45 - Toronto symbol HCG

HOME CAPITAL GROUP INC. $45 (Toronto symbol HCG; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 34.8 million; Market cap; $1.6 billion; Price-to-sales ratio: 2.3; Dividend yield: 2.0%; TSINetwork Rating: Average; www.homecapital.com) offers mortgages and other loans to borrowers who don’t meet the stricter criteria of larger, traditional lenders.

The company is seeing higher demand for mortgages. That’s mainly because fears of higher interest rates and slowing housing prices have prompted Canada’s big banks to make fewer loans to riskier borrowers.

In the three months ended March 31, 2012, Home Capital’s revenue rose 16.3%, to $214.7 million from $184.6 million a year earlier. Earnings per share rose 16.0%, to $1.52 from $1.31.

Home Capital continues to do a good job of identifying problem loans early. It then uses this information to restructure a borrower’s repayment terms and adjust its lending policies. As a result, bad loans fell to 0.28% of its total loans from 0.29% a year earlier.

The stock trades at just 7.1 times the $6.30 a share that Home Capital should earn in 2012. The company also recently raised its quarterly dividend by 10.0%, to $0.22 a share from $0.20. The new annual rate of $0.88 yields 2.0%. Home Capital has now raised its dividend 14 times in the past eight years.

Home Capital Group is a buy.

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