Joewolf
I have repeated in point form most of what you wrote, and given my views.
1. I am surprised it is this low sp. I think it may be a bit to do with payout ratio. Look at EQT. their dividend yield is also about 3.7% and yet they are roughly $26.00. they however only earn $1.15, so compared to CCP, which earns rougly $1.40, it is a huge difference.
US-listed companies tend not to pay dividends. Buffet's Berkshire Hathaway has never paid a dividend – the idea is that as the company grows via reinvestment of earnings, investors wealth grows, and if one needs funds, one sells a few shares. It is, IMO a quasi Ponzi scheme that is driven by USA taxation policy. US-listed companies often buy their own stock, and cancel those shares, thus the capital value is divided by fewer shares. Dividend multiples (share value ratio) are hence fairly meaningless in the USA.
In contrast in Australia, many stocks pay a fairly consistent ratio of dividends to earnings, often about 50% as CCP does. In this setting a dividend multiple comes pretty close to being similar to PER. At a PER of 16 for a stock that has a 50% dividend payout ratio of 50% would tend to have a dividend multiple of 16*.5 = 8. Australia's system of franking credits is not applied in may other countries, so if one is going to use dividend multipliers, they should differ from investor to investor and country to country.
2. Growth is pretty anemic in both and are both linked to the cycle. If we go into a recession then share values drop so EQT earns less. If we go into a recession the end outcome is more PDLs.
From an FA perspective, PDL business should be viewed over a multi-year cycle that includes one good buying cycle with its following good collections cycle. Its like an apple monger – the profit made for a stint should cover the buying and selling sides of commercial activity. For CCP, the share value is there in both phases (buy and collect), but the foibles of the human mind distort this, so the share price does not mirror share value. One can make money by exploiting the foibles as a trader, or in the long term by focusing on “value”, not “price”.
CCP's loan business dilutes the affect of the cyclicality of the PDL business. Its conservative accounting also flattens the cyclical affect.
3. I know that there are a few software companies delivering IT Driven debt collection, but dont see how they will get the debt collected any better than CCP.
CCP and Encore use collections application software. The benefit of the apps is to improve the economics, and this can be seen in the collections per hour statistics. It is the debt that the apps do not collect that requires human interaction.
4. The businesses are the same, but have we reached a point where gor the risk a dividend yield will drive a business rather than its earnings?
EQT (Encore) and CCP are only similar in that they both buy similar quality PDLs, mainly credit card charge-offs. I do not thing EQT has a loans business, and I am unsure if it has significant collections-as-a-service business, which CCP now has since acquiring Baycorp, but which was insignificant earlier. Encore uses more debt funding. On balance, CCP has a less risky business.
5. I saw a comment that operating cashflow was negative and a concern. This business can fudge its operating cashflow - slow down on PDL purchases and the cash flow goes positive or slow down on lending same result.
The apple monger does not have a bad morning when he buys apples, and a good few hours later when sells apples. Anybody valuing the business would look at a continuum of buying and selling apples. The time stints for CCP are longer – a perhaps five years.
The “fudging” does not occur by refraining from buying, it occurs by up-valuing PDLs bought soon after purchase, and the contra credit increases profit. This flows from the dysfunctional accounting standard mandated for the sector. The fudgers are tempted to buy, and buy, and buy, and make a profit via up-valuing, about which they make a great noise to raise more funds (loans and capital) to buy more PDLs, and this rose-strewn pathway ends in tears. I have written on this topic often over a number of years, just perform an advanced search using the words “accounting standard” and pick a few posts with a good score, 49818410 is only one of them.
CCP goes through the motions of complying with the 'fair-value” accounting standard, but in effect sticks to the old amortisation of PDLs via a percentage (45% to 47%) of the money collected. What occurs is that at the point of buying a PDL, CCP guesstimates the cash inflow it will generate, and when. It decides on a rate of return, and subjects that guestimated stream of cash to a present value calculation to derive a price for the PDL, and the interest rate used is called the “effective rate”. When the money is collected, it uses the “effective rate” to figure out how much of the collections value should be applied to amortise the PDL, so in theory CCP makes the profit it targeted to make. Variances are used to handle adjustments, but CCP's estimates are remarkably accurate, so variances are small per PDL, and minuscule in total because of offsetting. It is very important to understand CCP's accounting, and it has historically saved me from investing in PNC and CLY – they did not amortise enough, so the turd-hits-the-fan event was simply a question of time, IMO.
Personally I am not surprisedthat ANZ / NZ is slowing down - the government's have been handing out money like we never have to pay it back. The USA business is truly a great cyclical asset to buffer the ANZ/NZ business.
Too true.
Postscript. Strategically, CCP treats its loan business in a similar way to its PDL business. It uses its vas experience in numerics relevant to subprime debt to guestimate when loans would be repaid, and what would not be paid. It sets its lending criteria and its up-front impairment policy to achieve a targeted profit. Consequently, it views PDLs and its Loan Book in a similar way – they are just targets for the deployment of funds to generate a target profit. So much for the strategy, but there are tactical variations – make less profit to break into the loan business, and the US business, or make less per employee to keep collections teams together, because one cannot increase the supply of collectors easily when you need them.Juoewolf
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