Down 42%, This Dividend Growth Stock Is a Screaming Buy Right Now

Goeasy is an exceptional dividend growth stock that trades at an attractive valuation. Here’s why you need to buy GSY stock today.

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Buying dividend growth stocks is one strategy that has allowed investors to outpace the broader markets by a significant margin. Typically, dividend growth stocks increase cash flows and earnings at a consistent pace, allowing them to regularly raise dividends.

Further, investors can also benefit from long-term capital gains, potentially resulting in outsized gains over time.

One such TSX dividend stock is Goeasy (TSX:GSY), which has returned over 1,200% to shareholders in the last 10 years after adjusting for dividends. However, GSY stock is currently down 42% from all-time highs, providing an opportunity to buy on the dip and benefit from a dividend yield of 3.1%.

Let’s see why I’m bullish on Goeasy stock right now.

The bull case for Goeasy stock

Goeasy operates one of Canada’s largest non-prime lending businesses. It has originated $10.7 billion in loans via its family of brands to more than 1 million Canadians to date. The company uses risk-based pricing to graduate its customers to lower interest rates, which reduces their cost of debt.

Despite the COVID-19 pandemic, rising interest rates, and a sluggish macro economy, Goeasy has delivered an average return on equity of 26.5% in the last five years. The lender has established credit and underwriting practices to manage risk. As a result, it enjoys stable credit performance across market cycles.

Armed with diversified sources of funding, Goeasy maintains a robust balance sheet, enabling it to successfully execute multiple growth initiatives. The company is in the early stages of product, channel, and geographic expansion as it aims to end 2024 with a loan portfolio of $4 billion.

In the last 10 years, Goeasy increased sales at an annual rate of 17.7%, while net income has grown by 28.9% each year. This has allowed Goeasy to increase its dividends at a compound annual growth rate of 17.8% in the last 16 years. This growth is exceptional for a company in the highly cyclical lending industry.

GSY stock is very cheap

Despite a challenging environment, Goeasy reported record revenue of $287 million in Q1 2023, an increase of 24% year over year. Its total loan originations also grew by 29% to $616 million in the March quarter.

Goeasy experienced stable credit performance in Q1 with a net charge-off rate of 8.9%. Basically, the net charge-off rate is the percentage of debt a company believes it will be unable to collect. This metric is consistent with Goeasy’s 8.8% figure in the year-ago quarter and in line with its target range of between 8% and 10%. An improved portfolio mix and delinquency performance allowed Goeasy to reduce future credit losses to 7.5% in Q1 compared to 7.6% in Q4 2022.

In the Q1 earnings press release, Goeasy emphasized, “The stable credit performance reflects the resilience of the non-prime consumer, coupled with the improved product mix of the loan portfolio and the proactive credit and underwriting enhancements made since the fourth quarter of 2021.”

Valued at a market cap of $2.1 billion, Goeasy is on track to increase sales by 21.3% to $1.2 billion in 2023. Comparatively, its adjusted earnings are forecast to rise by 18% to $13.64 per share this year.

So, GSY stock is priced at 1.7 times forward sales and 9.2 times forward earnings. Goeasy stock is really cheap and trades at a discount of 31% to consensus price target estimates.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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