What if I told you that there was a stock on the TSX with a 7.82% dividend yield and a share price that has increased 4.08% year-to-date?
This is actually a reality for investors of Chesswood (TSX:CHW). The company owns a consortium of equipment financing companies that include Blue Chip Leasing Corporation, Pawnee Leasing Corporation and Tandem Finance Inc.
Pawnee focuses on micro and small-ticket equipment financing to small and medium-sized businesses in the United States. Tandem focuses on small-ticket equipment financing through vendors and distributors in the U.S. and Blue Chip provides commercial equipment financing to small and medium-sized businesses in Canada.
An interpretation of the numbers
For the three-months ended March 31, 2019, the company reports an acceptable balance sheet with a growth in assets of $12 million. This is offset by $15 million in liabilities, which resulted in a decline in shareholders’ equity of $3 million.
The increase in liabilities is driven by an increase in borrowings by $16 million (which makes sense given the growth in revenues).
Its income statement indicates revenue growth of $5.5 million driven by interest revenue on finance leases and loans. These gains are offset by interest expense that grew $3 million and provision for credit losses that grew $2.8 million.
Net income of $3 million (down from $5.9 million the prior year) was mainly due to $1.4 million increase in other expenses.
The company is reporting a negative operating cash flow of $20 million, an improvement of 29 million the prior year. Its ending cash balance is $2.8 million (down from $6.4 million the prior year), which is lower than I’d like to see, but given the company’s credit facilities, it isn’t that concerning.
But wait — there’s more
I’m a bit concerned about the companies allowance for credit losses — losses that increased from $4.5 million for the three months ended March 31, 2018 to $7.3 million for the same period in 2019.
The company reclassified $8.8 million of performing credit losses to under-performing and $8.1 million of under-performing to non-performing. This signals a decrease in the quality of the company’s borrowers.
The company defines the following classes of credit losses:
Performing: New leases and loans recognized and for existing leases or loans that have not experienced a significant increase in credit risk since initial recognition, a loss is recognized equal to the credit losses expected to result from defaults occurring in the next 12 months.
Under-performing: Leases or loans that have experienced a significant increase in credit risk since initial recognition, a loss allowance is recognized equal to the credit losses expected over the remaining life of the lease or loan.
Non-performing: Leases or loans that are credit-impaired, a loss allowance equal to full lifetime expected credit loss is recognized.
On a positive note, the company reports a total of USD $500 million and CAD $100 million in credit facilities that are not close to being maxed, giving the company sufficient access to capital.
Investors seeking a dividend stock coupled with the potential for significant capital gains should consider buying shares of Chesswood. Evidently, there are some concerns with its balance sheet, such as its low cash balance and increase provision for credit losses.
Despite this, however, I believe the company is well capitalized to mitigate the risks associated with defaults and to draw on existing lines to fund future business growth.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Chen Liu has no position in any of the stocks mentioned. The Motley Fool recommends CHESSWOOD GROUP LIMITED. Chesswood Group Limited is a recommendation of Dividend Investor Canada.