"eBay of Finance" Individual-to-Individual Loans as Investment?

[Nords]

I suspect the calculations are way beyond me, but AF has paid cumulative dividends of about $4.50 a share since 1993 on a stock that you could have bought for about $4.75 back then.  COF has always paid a dividend that could best be described as "nominal".  

What we need is a good reinvested-dividends performance chart...

 

[Cool Dood]

What I am getting at is that you can lend on prosper for only a few % over treasuries, yet if consumer credity quality (which is currently very good) degrades you would take a beating. When a default happens with this type of loan, you would be lucky to get 10 cents on the dollar in recovery. Not enough reward for the risk, IMO, and there are plenty of better places to take the risk if you are chasing yield.

Fair enough, I understand your point.

By the way, what would you recommend for yield-chasing?

 

[brewer12345]

By the way, what would you recommend for yield-chasing?

Puerto Rican muni bonds, STON, EGLE, GSTL, ISM, CHC, maybe a few select junk bonds. I also picked up some BPOP and I am considering picking up more.

 

[Cool Dood]

How on earth can GSTL have a 14.4% yield?

 

[Nords]

How on earth can GSTL have a 14.4% yield?

By continuing to pay a healthy cash-flow dividend while its stock price goes down.

Take a look at EGLE-- big dividend AND share appreciation.

We're getting into the season for which we've all been saving our dry powder. Don't everyone start running away now!

 

[brewer12345]

How on earth can GSTL have a 14.4% yield?

Heh, that's nothing, EGLE is over 15%. Like I said, there are better places to chase yield. O0

Both companies pay out basically all of their cashflow and they trade at ver low multiples. Part of the reason is that their charter rates are locked in at above current spot market rates, and the market is a-feared that they will have to roll over charters at much lower rates. But if you re-set all of EGLE's charters to current markket rates, it would still yield about 13%, and rates for their ships have risen greatly in the last few months (and they continue to go up).

 

[Cool Dood]

Heh, that's nothing, EGLE is over 15%. Like I said, there are better places to chase yield. O0

And how could you go wrong with a company whose CEO is Sophocles, and whose CFO is Alan Ginsberg?

Both companies pay out basically all of their cashflow and they trade at ver low multiples. Part of the reason is that their charter rates are locked in at above current spot market rates, and the market is a-feared that they will have to roll over charters at much lower rates. But if you re-set all of EGLE's charters to current markket rates, it would still yield about 13%, and rates for their ships have risen greatly in the last few months (and they continue to go up).

Couple of questions: EGLE payout ratio is 180% -- is that just some anomaly, or is there an explanation?

What are the significant risks? You'd think that with a dividend that high, people would flood into it and drive the price higher? Wouldn't there pretty much have to be some large risks associated for people not to switch out of, say, corporate bonds and into that?

 

[Cool Dood]

Likewise, have a look at ECR -- is there something wrong with that? Or is it free money?

 

[Nords]

Couple of questions: EGLE payout ratio is 180% -- is that just some anomaly, or is there an explanation?

The accounting forces the reported profits to be much lower than the cash flow.  The dividends are driven by cash flow, not by taking on additional debt.  The typical shady company's "high-yield" strategy involves loading up on debt (or draining cash reserves) to sustain an eye-popping dividend.  (Like, oh, say, GM before they whacked their dividend.)  EGLE (so far) is using cash flow (not debt or reserves) to pay the dividend.

What are the significant risks? You'd think that with a dividend that high, people would flood into it and drive the price higher? Wouldn't there pretty much have to be some large risks associated for people not to switch out of, say, corporate bonds and into that?

1.  Only been public for 16 months, not followed by very many analysts.  People are blissfully ignorant.
2.  Thinly traded (not many mutual funds or institutional investors).
3.  Small-cap stock (although that's growing).
4.  Gotta have faith in management to be able to run a shipping schedule and not get nailed by maintenance or drydock issues.
5.  Chartered in the Marshall Islands, which for some reason gives investors pause.  The company's business address is actually in NYC.
6.  Many of the shares are locked up in the hands of the VCs who financed the company before its IPO.  They're holding onto those shares (for a good reason!) but dumping them onto a thinly-traded market could severly depress the share price.  That also concerns mutual funds & institutions.
7.  Many dry-bulk (not container) shippers go through a cyclic season that drastically affects their expected cash flow (profits).  They're also using older ships.  The whole concept of dry-bulk shipping has taken on the image of rusty freighters limping between ports hoping to find something to ship to another port before they can't pay their crew or their fuel bill.  EGLE, by contrast, has been chartering out their services way in advance (less fluctuation) and giving value for that with a modern fleet of bigger ships able to crane their own loads.  (Nearly a quarter of their ports of call can't offload the ships as quickly as the ships can offload themselves.)  Yeah, it's more expensive up front for the shipper, but their unit costs & port fees are much lower.  EGLE is bottom-fishing in places like China, India, & southeast Asia that most of us never knew existed, let alone saw as a profit opportunity.  

I'm up almost 6% since January on a cost basis of $12.46 (currently trading at $13.14) and re-investing shares.  Looking at Brewer's posts, I see he first mentioned EGLE last July.

 

[brewer12345]

Like I said, EGLE pays out all its cash flow.  In this case, cash flow is considerably in excess of their reprted net income.

Is there risk?  Sure.  The company is young and has a limited operating history.  They have a short dividend history.  The dividend is likely to fluctuate from quarter to quarter (up and down).  Shipping rates are pretty volatile.

Basically everything hines with that company on what charter rates for their ships are.  Will they go down or up?  I dunno for sure, but in an inflationary environment where the USD is falling, I think I can guess.  But the company has little debt and if there were a severe downturn they would emerge relatively unscathed.

ECR - wouldn't touch it with someone else's 10 foot pole.

 

[Cool Dood]

Wow, one gets thorough answers here!

nords, thanks for the info!

brewer, thanks for the info! and is it possible for you to explain what's wrong with ECR? I'm curious.

 

[brewer12345]

explain what's wrong with ECR? I'm curious.

ECR is a subprime mortgage REIT. They make loans to people who shouldn't get them and fund the loans by borrowing the money. Scared yet?

They also make loans to these crappy borrowers and then sell the loans to other investors. Since the market for these loans is soft, they have to take a loss sometimes. If the demand for these loans dries up, they could be stuck with a pile of junky mortgages they can't sell. Scared yet?

The dual model of make and hold loans plus make and sell loans potentially allows them to play games with earnings. How? If you have a good, saleable loan, you sell it and show the marmket that you are making money. Crappy loans you originated at the same time go into your portfolio because they probably won't blow up for a while and they typically aren't marked to maret value. Scared yet?

They also seem to be having a tough time borrowing cheaply enough to fund their loans. Rates on borrowing are rising faster than rates on the loans they own. Classic spread squeeze. Scared yet?

If there is a problem with RE, consumer credit, interest rate volatility, or the capital markets, they are dead. Plus they have suspended dividends.

 

[Cool Dood]

ok, that sounds really, really crappy.


No, I mean, like the crappiest thing I've ever heard, pretty much....

 

[brewer12345]

ok, that sounds really, really crappy.


No, I mean, like the crappiest thing I've ever heard, pretty much....

Sorry. Financial institutions are my specialty, and I greatly prefer quality (at a decent price, mind you).

 

[Cool Dood]

Well, it's not like I'm disappointed -- I expected there to be a catch, and was curious as to what it would be. I've never before given much (if any) thought to big dividend payers, and was a bit shocked to see how high they can be when you mentioned some of your picks. So I looked around to see how high they actually got, and saw ECR listed at 45.3%, and wanted to understand what reasons there could be for it to look like that.

Oh, and in case it wasn't clear, by "that sounds really, really crappy" I meant the company, not anything you said. You probably already knew that, in which case I guess I sound like a complete moron again ...ah, the communication troubles of the Internet.......

 

[brewer12345]

No, I got what you meant. I just also know that I tend to get carried away on my chosen subjects.

 

[soupcxan]

Prosper is a cool idea but I think it will utlimately turn out to be another example of Ackerloff's Market for Lemons.

The people that are so hard up for credit that they have to turn to Prosper will be terrible credit risks that lenders will want more than borrowers are willing to pay.