The first quarter earnings season affected the stocks of many companies, Timbercreek Financial (TSX: TF) being one. The stock fell 9.2% after the short-term mortgage lender reported a slowdown in net investment income in the first quarter. The weak earnings come immediately after the lender had one of its best years, earning 10% interest. It even gave a special dividend last year. Are the latest earnings something investors should worry about? Is the dip a discount you want to grab before the 9.7% dividend yield goes? Let’s get answers for your curious minds.
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What does Timbercreek Financial’s latest earnings mean to investors?
Timbercreek Financial earns money by giving short-term loans to commercial REITs for investment in income-generating properties. The more money it lends the higher interest and processing fees it earns. In 2023, the company earned higher interest income as the Bank of Canada hiked rates. However, this reduced the turnover as REITs slowed their investment until loans became affordable.
Timbercreek Financial finances the money it lends through debentures and credit facilities that charge lower interest rates. In the first quarter, one of its larger borrowers repaid its loan. The lender has been getting significant repayments for the last two quarters, which reduced the net mortgage investments to $977.5 million in the first quarter from $1.2 billion a year ago.
The slowdown in the top line affected the operating income and distributable income. As the lender retained its dividends, the payout ratio increased to 90% of distributable income. This made investors cautious of a dividend cut leading to a dip in the stock price.
While Timbercreek Financial has strong operations, it is seeking borrowers. Any announcement around interest rate cuts could spur loan activity once again as REITs get clarity around real estate prices. This wait-and-watch time is crucial.
Is the dip a discount you want to grab?
While Timbercreek Financial can sustain a 90% payout ratio in the short term, it cannot in the long term. If the lending activity doesn’t revive, it could lead to dividend cuts. However, the lender is optimistic that a stable interest rate environment will drive commercial real estate activity this year.
An interest rate cut announcement could drive up Timbercreek Financial’s stock price. It is unclear whether the interest rate cut is coming in June or the second half. Timbercreek Financial is a buy at the dip.
Even if the lender cuts dividends when things go south, it will likely increase the dividend when the economy revives and lending activity returns. A 9.7% yield is an attractive premium for this short-term risk. These short-term headwinds could bring significant long-term returns.
Moreover, TF offers a dividend reinvestment plan (DRIP), allowing you to compound your returns over time.
What can a 9.7% dividend yield do to your retirement portfolio?
If you invest a lump sum amount and lock in a 9.7% yield, Timbercreek Financial could boost your passive income for retirement through compounding.
| Year | Contribution | Dividends @ 8% | Total Amount |
| 2024 | $20,000.0 | $20,000.0 | |
| 2025 | $1,940.0 | $21,940.0 | |
| 2026 | $1,755.2 | $23,695.2 | |
| 2027 | $1,895.6 | $25,590.8 | |
| 2028 | $2,047.3 | $27,638.1 | |
| 2029 | $2,211.0 | $29,849.1 | |
| 2030 | $2,387.9 | $32,237.1 | |
| 2031 | $2,579.0 | $34,816.0 | |
| 2032 | $2,785.3 | $37,601.3 | |
| 2033 | $3,008.1 | $40,609.4 | |
| 2034 | $3,248.8 | $43,858.2 | |
| 2035 | $3,508.7 |
A $20,000 investment can earn $1,940 in annual dividends, which it will reinvest in a DRIP to buy more shares of Timbercreek Financial without any brokerage fees. Since TF has a five-year average yield of 8%, next year, you could get an 8% yield on $21,940. In 10 years, if you opt for a payout, your one-time $20,000 could earn you over $250 cash every month.
Since TF pays monthly dividends, your dividend will be reinvested monthly instead of annually, which we took for ease of calculations. Now is the time to invest in the dip before it rallies.
