HOME CAPITAL GROUP INC. $56 - Toronto symbol HCG

HOME CAPITAL GROUP INC. $56 (Toronto symbol HCG; Aggressive Growth Portfolio, Finance sector; Shares outstanding: 34.7 million; Market cap; $1.9 billion; Price-to-sales ratio: 2.2; Dividend yield: 1.9%; TSINetwork Rating: Average; www.homecapital.com) is a mortgage lender that serves borrowers who don’t meet the stricter standards of larger, traditional lenders, like banks.

Even though Home Capital caters to riskier borrowers, it avoids huge credit losses by identifying problem loans early. It then uses this information to restructure a borrower’s repayment terms and adjust its lending policies.

In the three months ended September 30, 2012, Home Capital’s earnings rose 18.3%, to a record $57.3 million, or $1.65 a share. A year earlier, the company earned $48.4 million, or $1.39 a share.

Low interest rates and rising real estate values continue to fuel demand for mortgages and other loans. That pushed up Home Capital’s revenue by 14.0%, to $226.6 million from $198.7 million.

The company set aside $4.2 million to cover future loan losses in the latest quarter, up 80.5% from $2.3 million a year earlier. However, that’s mainly because Home Capital is shifting toward more profitable traditional mortgages that are not insured by the Canada Mortgage and Housing Corporation. Even after this jump, bad loans still account for just 0.28% of its total loans, up slightly from 0.25% a year earlier.

The Bank of Canada will probably keep interest rates low until 2014. That should help stabilize housing prices and continue to fuel demand for mortgages and other loans.

Thanks to its improving outlook, Home Capital recently raised its quarterly dividend by 18.2%, to $0.26 a share from $0.22. The new annual rate of $1.04 yields 1.9%. Home Capital also trades at just 8.8 times its projected 2012 earnings of $6.39 a share.

Home Capital Group is a buy.

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