Because I spend hours and hours scouring the internet instead of doing anything productive, I’ve discovered a Canadian way to invest in payday loans. And no, I’m not talking about lending your buddy $50 for smokes and booze until next week. Besides, he’s not going to pay you back. You suck.
I know, I know. We all think payday loans are bad, and dumb, and worse than a Suze Orman endorsed prepaid credit card. And obviously, I’m not encouraging anybody reading this to go out and borrow money from one of these companies. They are the financial equivalent of heroin.
(Related: How to invest in weed)
But, saying that, I think people who smoke cigarettes and overindulge in alcohol are a special kind of stupid too. Both of those things are detrimental to your long term health, and really shouldn’t be done by anyone. Just because I think something is dumb doesn’t necessarily mean I don’t support your right to do stupid things, especially when those stupid things hurt only yourself.
So with that being said, I would have no problem plunking down some cash to invest in payday loans. Let’s see how.
In Canada, there is one publicly traded payday loan company, Cash Store Financial. The company was founded approximately a decade ago, out of Edmonton, and has quickly grown to over 500 locations across Canada, under the Cash Store and Instaloans labels. Close to 200 of these locations are in Ontario, which will become important in a minute. They also have a UK division, which is up to 25 stores.
The stock has struggled lately, as a bunch of factors have caused it to fall. The company was acting as an intermediary between customers and a Canadian bank, (DC Bank, to be precise) letting the bank take the credit risk. The bank was charging for this, obviously, and the company thought they could do a better job themselves. So they took a charge, severed the contract, and then borrowed a bunch of money to eventually be lent to dirtbags. This increased The Cash Store’s financial risk, which the market didn’t like.
And then, the company announced their dividend would be eliminated, at least for the time being, but in an odd way. Instead of releasing a statement, management just mentioned it on the conference call. Google Finance still thinks they pay a dividend. They do not. They’re also closing non-performing stores, and year over year revenue isn’t increasing.
And then, the big whammy. The Province of Ontario announced they were issuing a proposal to shut down the company’s operations in Ontario. The reason? In Ontario, the company can only charge a maximum of 21% for a loan, which includes interest and all fees. So the company does. What’s the problem?
Even though it’s called The Cash Store, the company’s business model involves zero actual cash. Everything is done electronically. If you get a payday loan with them, they put that money in your bank account. When it’s time to pay up, they take that money from the borrower’s account, just like any regular bill payment. This is all fine and good, except sometimes the money isn’t there. (remember who we’re dealing with here) So they charge the borrower an NSF fee, which pushes the cost of the loan above the legal limit.
The company has responded to the province. They plan to fight, and so on. They’ve also responded by no longer offering payday loans in Ontario. They offer lines of credit now, which are totally different than payday loans. How? Instead of having to pay it back by your payday, you now get two paydays to pay it back. It’s the payday loan version of putting two googly eyes on your cat’s ass and calling it a whole new animal.
The company is fighting the province’s desire to kick them out, but I’m not sure they’re going to win. Offering a line of credit that’s barely different than a traditional payday loan isn’t going to please the regulators.
Let’s look at the worst case scenario, which is the company getting kicked out of Ontario. They currently have 511 stores open, around 180 are in Canada’s biggest province, or 35%. Revenues would fall from $187M to $121.5M. The company lost money last year, approximately $3M once you take away the $40M charge they took when they severed their relationship with DC Bank. They’ve had several bad quarters in a row, they haven’t posted a profitable quarter in nearly a year.
The balance sheet isn’t great either, thanks to the $130M the company borrowed. They also have a lot of goodwill and intangible assets on the books, something no value investor likes to see. There’s very little in real assets the company can sell if things start to go badly.
Anyway, I’m getting bored. You anti-payday-loan people will be happy. Buying shares in The Cash Store is not a good way to invest in a title loan company. Although these people should probably know that I’d have no problem buying shares if the company’s fundamentals weren’t so bad.