goeasy’s (TSX:GSY) dividend has been the object of considerable concern lately. On March 10, the company put out an earnings release that missed expectations and announced that it had suspended its dividend. The two news items were taken so poorly by investors that GSY stock fell an impressive 57% in a single day following their announcement.
Clearly, investors have been disappointed with what’s been going on with goeasy’s dividend. The question is, what does this dividend halt mean? If goeasy thinks that it can’t afford to pay a dividend due to temporary issues, then the halt might not be such a big deal. Perhaps the stock’s dramatic decline in price presents a buying opportunity. On the other hand, if the company has halted its dividend for structural reasons, then it may never be able to pay a dividend again, because all of its money will be going to creditors. In this article, I explore goeasy’s dividend cut and what it means for shareholders.
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Why goeasy cut its dividend
The simple explanation for why goeasy had to cut its dividend is because it had to. As the company’s recent earnings release revealed, the company had simply run into too many structural problems for it to continue paying dividends. Even paying bondholders was going to be an issue.
For one, the company charged off $178 million worth of loans and wrote off $55 million worth of related interest and income. A “charge off” is when a lender decides that a debt is not collectible; a “write off” is an accounting reduction in asset values. For a company that does $955 million (after loan loss provisions) in yearly revenue, $178 million is a significant sum of money. Big enough that you have to wonder whether the company’s revenue will be lower in the future (remember, these charge-offs and write-offs represent interest income that’s not expected to be collected).
Another problem is that goeasy breached debt covenants. A debt covenant is a set of terms you agree to when you borrow money. A breach of covenant is when you break one of these terms. Let’s say, for example, that a loan has a covenant stipulating you must spend it on tuition, but you spend it on beer instead. That’s a breach of covenant.
The issue with breaches of covenant is that they can encourage bondholders to sue a company. If goeasy were to be sued, then its financial problems would be even bigger than they are now. Potentially, it would have to pay out large sums of money.
So, to make a long story short, goeasy’s dividend cut was due to financial uncertainty brought on by bad loans.
Is the stock a buy?
Having explored the uncertainty surrounding goeasy’s dividend, we might feel tempted to go out and buy GSY stock. The issues facing it certainly look temporary, and the stock is down 57% and trading at 2.3 times adjusted earnings!
It looks enticing, but I will pass for now. It appears this company has been badly mismanaging its risks and breaking agreements made with bond holders. Both of these are red flags.
