The financial crisis in the U.S. has dragged valuations of companies in the lending sector significantly lower in 2023. Investors are worried that rising interest rates, inflation, and the threat of a recession will result in a tepid lending environment in the near term. These macro factors will also push delinquency rates higher.
But owing to the pullback, investors can buy shares of fundamentally sound lending companies at a discount and benefit from outsized gains over time. Here, I have identified one such oversold TSX stock that also offers you a tasty dividend yield of 4.2%.
Is Goeasy stock a buy or a sell?
One of the major players in Canada’s non-prime lending sector, Goeasy (TSX:GSY) has originated $10.1 billion in loans to 1.3 million residents to date. Its portfolio of brands includes easyfinancial, easyhome, and LendCare.
Easyfinancial offers a suite of lending products that include unsecured and secured personal loans through a network of 400 retail locations. Easyhome is the company’s retail division, offering lease-to-own purchasing alternatives to consumers. LendCare is the point-of-sale financing business for Goeasy. It has partnered with 6,500 merchants to provide buy-now-pay-later financing options to customers.
Despite a challenging macro environment, Goeasy’s loan originations touched $632 million in Q4 of 2022, an increase of 25% year over year. The company emphasized lending growth was driven across its product portfolio. The lending businesses include unsecured lending, home equity loans, auto financing, and point-of-sale lending.
Goeasy ended 2022 with a consumer loan receivable portfolio of $2.8 billion, an increase of 38% compared to the prior-year period. This allowed it to increase sales by 17% to $273 million in Q4 of 2022.
Goeasy experienced stable credit and payment performance in 2022, with a net charge-off rate of 9% in Q4, which is within its target range. This stable credit performance reflects an improved credit quality profile and product mix for Goeasy’s loan portfolio.
Goeasy’s allowance for credit losses rose marginally to 7.6% in Q4 from 7.6% in the prior quarter. Its operating income was down 5% at $75.9 million as its operating margin narrowed by around 600 basis points to 27.8% in the December quarter.
Goeasy is a top TSX stock
Goeasy has created massive wealth for long-term shareholders. GSY stock is up 1,000% in the last 10 years and has returned a staggering 3,400% since May 2003, after adjusting for dividends. Down 58% from all-time highs, Goeasy stock currently offers you a dividend yield of 4.2%, given it pays shareholders annual dividends of $3.84 per share.
While Goeasy is part of a cyclical industry, remarkably, the lender has increased dividends by 18% annually over the last 15 years. Despite its outsized gains, GSY stock is priced quite cheaply at 6.6 times forward earnings.
In the last five years, Goeasy has delivered an average return on equity (ROE) of 26.5%. Through its established credit and underwriting practices, the lender manages risk better and delivers stable credit performance. Armed with a strong balance sheet and diversified funding sources, Goeasy is well-poised to execute multiple growth initiatives.
Analysts remain bullish on Goeasy and expect shares to surge around 80% in the next 12 months.