Home Capital Group Inc. (TSX:HCG) and Equitable Group Inc. (TSX:EQB) have experienced a lot of volatility as of late. In the last month, Home Capital’s shares have declined 76%. The shares of Home Capital’s rival, Equitable, have also been dragged down. Equitable’s shares have declined 34% in the last month.
The market has painted the industry with a wide brush. Is it right to do so? Are the dips buying opportunities, or should you avoid the companies?
First, let’s take a look at Home Capital’s business.
Home Capital’s business
Home Capital primarily operates through Home Trust, which is federally regulated and offers deposits, mortgage lending, and consumer lending. It has offices in Ontario, Alberta, British Columbia, Nova Scotia, Quebec, and Manitoba.
Is Home Capital a buy?
The fallen shares have to do with a chain reaction which started from an investigation by the Ontario Securities Commission with regards to misleading statements. Fellow Fool writer, Matt Smith, described Home Capital’s problems in his recent article.
The mortgage-lending space has been very lucrative, and that’s why Home Capital had an impressive dividend-growth track record. In the last 10 years, the company had hiked its dividend at a compound annual growth rate of about 21%, and its quarterly dividend was 8.3% higher than it was a year ago. At least that was the case before it suspended its dividend on Monday. That said, the suspension of the dividend is a prudent move given that the company needs more liquidity right now.
Home Capital has had major changes to its board, and the company may eventually be taken out by potential buyers, such as Brookfield Asset Management, Fairfax Financial Holdings, or Blackstone, or it could end up selling some of its assets. Moreover, more volatility would likely arise as the mortgage lender is set to release its first-quarter results after the market close on May 11.
What about Equitable?
Equitable is in a similar line of business as Home Capital. Equitable’s shares have dropped due to a ripple effect originating from Home Capital.
However, the shares have rebounded about 26% from the April 28 low since the company released strong first-quarter results on May 1.
Some first-quarter highlights include growing its earnings per share by 49% compared to Q1 2016. It had a high return on equity of 18.4%. Additionally, it had $21.7 billion of mortgages under management, which was 23% higher than a year ago.
Equitable has a decent history of dividend growth. It has increased its dividend for six consecutive years, its five-year dividend-growth rate is about 13%, and its quarterly dividend per share is 9.5% higher than it was a year ago.
Equitable offers a 2% yield with a sustainable payout ratio of under 11%.
Investor takeaway
Operating in the mortgage-lending space is lucrative if done right. Both companies have maintained a return on equity of north of 14% in the last decade.
Home Capital trades at a dirt-cheap valuation (about 0.23 times its book value) at below $6 per share, but it has major headwinds and has increased uncertainty in the near term.
As such, it’s probably safer to consider Equitable as an investment instead. Its shares were dragged down along with Home Capital’s issues. At its recent price of about $46 per share, Equitable trades at 0.8 times its book value. This is about a 38% discount from its five-year average.
To sum it up, Home Capital can deliver higher returns due to its cheap valuation. However, it’s more of a speculative investment than Equitable at this juncture.
