Many dividend stocks recovered from their lows as the Bank of Canada cut interest rates. However, goeasy (TSX: GSY) stock has dipped almost 21% since Trump tariffs were implemented on January 24, 2025. This dip inflated the dividend yield to 3.9%.
Should you consider buying the stock at the current dip? To answer this, you need to know why the stock fell.
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Why is this dividend knight trading at a deep discount?
The non-prime lender is trading at a 21% discount, as many factors have created uncertainty around its near-term future.
Macro-economic factors
The macroeconomic environment has been stressful for the last two years. First, rising interest rates in 2022 due to decade-high inflation made many things unaffordable, driving demand for loans. The rate cut began in July 2024, which improved consumption and drove loan origination. However, credit losses increased as Canadians struggled to make ends meet.
A non-prime lender thrives in a strong macro environment as people have more money in their hands and default rates are lower. However, credit losses widened in the first quarter of 2025, which affected goeasy’s net profit.
Its loan portfolio has tripled in the last five years, and the current portfolio has 55% unsecured and 45% secured loans. As the loan portfolio increased, so did the credit loss provision because of a weak macroeconomic environment.
goeasy increased its credit loss provision by $7.7 million year-over-year to $26.6 million in the first quarter of 2025. The loan portfolio increased by $950 million. However, its net charge-off rate reduced to 8.9% from 9.1% a year ago. Moreover, the company’s yield on consumer loans fell to 31.3% from 35% in the year-ago quarter.
Declining profits
Rising credit loss provisions and lower yield on consumer loans reduced goeasy’s profits and free cash flow by 33.2% and 59.5%, respectively. Lower profit reduced its return on equity to 13.4% from 21.9% a year ago.
Management change
Amidst these difficult times, goeasy saw a major management change. Jason Mullins stepped down as goeasy CEO after 14 years in the company, and Scotiabank Group Head of Canadian Banking Dan Rees took the helm on March 3. It is the first time in 25 years that goeasy has hired an external CEO.
Management change brings uncertainty around possible changes in operations and strategies. And goeasy’s management change brings several questions.
- Can a banking person lead a non-prime lender that caters to customers rejected by banks?
- Can an external CEO continue to lead a company with the same passion and innovation?
Most likely, investors are overreacting. Beacon Securities analyst Doug Cooper believes Rees may not bring any strategic changes, but tweak a few things to improve goeasy’s pain point – loan collections.
All these factors have pulled down goeasy’s stock price.
Should you buy this dividend knight at the dip?
The short-term outlook is volatile and could stress goeasy’s profit margins. However, its long-term outlook remains strong.
Its $2 billion in liquidity will help the lender withstand macroeconomic uncertainty and a mild recession. The worst may soon be over, and the next growth cycle will begin. This cycle could see improvement in loan collections, which could bring back the credit loss allowance deducted from current revenue. Moreover, the secular growth trend of growing the loan portfolio through new product launches, more distribution channels, and tapping new geographic areas remains intact.
Coming to the dividend investing case, goeasy continued to pay dividends even when free cash flow fell. It grew its dividend for the 11th straight year. The lender even paid dividends during the 2008 Financial Crisis, showing the resilience of its credit model. This resilience makes goeasy a buy at the dip. The new CEO could bring new growth opportunities.
You can consider buying the stock at the dip and enjoy the stable dividend and future recovery rally from the next growth cycle.
