First National Financial (TSX:FN) is a Canadian non-bank lender that issues mortgages. This year, its stock price has fallen, because of concerns about liquidity at lenders, such as banks. It is true that some big banks are suffering from liquidity problems at the moment. However, they’re also delivering strong earnings growth. Banks that manage the risks well are likely to deliver continued growth and profits for their investors.
However, there is one serious concern with banks: deposit flight. If too many depositors withdraw their money from a bank, the bank has to come up with money to pay them off. If it doesn’t hold enough in cash and liquid securities, it may fail.
This is where First National Financial (TSX:FN) comes into the picture. As a mortgage lender, it collects extra interest revenue when rates rise, just like banks do. However, as a non-bank lender, it doesn’t have deposits and therefore doesn’t have to worry about bank runs. This fact makes it a stock worth considering in our new era of high interest rates.
What is First National Financial?
First National Financial is a non-bank lender that issues mortgages to Canadians. It does this by partnering with mortgage brokers, who refer them leads. First National finances its mortgages by issuing bonds. These bonds have set maturity dates; they can’t just be “withdrawn” like bank deposits can be. This means that liquidity isn’t as big a concern for First National as it is for banks.
It also means that FN doesn’t have to worry about yield curve inversion (a downward-sloping chart of treasuries with terms to maturity on the X-axis). Inversion is usually considered bad news for banks, because they borrow on the short end of the curve and lend on the long end.
Last quarter, many Canadian banks saw their earnings growth turn negative, consistent with the yield curve inversion we’ve been seeing this year. First National, however, is still growing its earnings at a high double-digit pace, as I’ll show in the next section.
In its most recent quarter, First National Financial delivered the following:
- $138 billion in mortgages under administration, up 8%
- $526 million in revenue, up 26%
- $89 million in net income, up 47%
- $89.9 million in pre-fair market value (FMV) income, up 60% (pre-FMV income means net income minus asset price changes)
- $11.1 billion in new mortgages originated, down 9% year over year though up 68% sequentially
It was an excellent quarter, delivering high growth and high profitability at the same time. It was also much better than the results any of the Big Six banks posted in the same period, confirming my suspicion that non-bank lenders may fare better than banks in this environment.
Can you trust the 6.7% yield?
It’s one thing to note that a stock has a high yield on paper, but quite another to assert that investors will actually get that yield. To be paid consistently over time, a dividend has to be sustainable. We measure that with the “payout ratio,” which is simply dividend divided by earnings. For FN, this ratio is 41%, meaning it doesn’t even pay out half of its earnings as dividends. On the whole, it looks like the dividend will continue to be paid.
The post Better Than GICs: First National Financial Stock Pays a Magnificent 6.7% Yield appeared first on The Motley Fool Canada.
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