Credit Companies I'm Dubious About

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Financial services companies, and credit companies in particular, have to walk a crazy path. On the one hand, they've got to make money for their employees and shareholders. But on the other hand, they have a lot of rules they have to abide by despite the disadvantages that these rules impose. I don't envy their position, but I am out to see if they can make their money honestly. Is there integrity in a payday lender, a credit rating company or a business development company? Let's find out.

Cash America International (NYSE: CSH) provides a threefold service through issuing short term (payday) loans, cashing paychecks and allowing people to pawn goods. The company acts through an online segment, several different brands of payday loan and pawn shops. With extensive Internet and international exposure, I like how Cash America is protected from currency issues that tend to impact a single country's money. I also like how the company is still at a small enough market cap that serious growth is possible.

Of course, every bright yellow building has its dark shadow. For some reason, Cash America is paying a paltry .3% dividend, which I commonly refer to as a "why bother?" While this tends to be because of heavy insider ownership and thus indicates stability, the 6% profit margin Cash America is pulling in despite being well represented in the US (the world's largest economy) and Australia (the economy that fared the best through the Great Recession). While I've no problem with Cash America's valuation, the company itself does nothing for me as far as its growth prospects. As well, it plays at the bottom of the barrel and deals with the most high-risk people: folks who don't have checking accounts and who often get paid by individuals or companies that bounce checks. This undoubtedly undermines Cash America's margins and its growth prospects.

Normally I'd indicate that with a solid plan for the rest of Europe and Asia this could be a super growth story, I don't see evidence of such a plan in place. Particularly troubling is that Cash America used to have a full European segment that included stores in Sweden. But then it sold these assets as well as many of its UK stores, only to buy back into Britain but not into the mainland. I would invite you to look into why if you're intrigued, but to be honest I just see a company flailing around and throwing mud against a wall to see what sticks. I think I can do better.

Equifax (NYSE: EFX) is a stalwart of 14 countries with a charter to rate credit throughout the US. I like the moat of size that Equifax brings to the table as well as its special status. I also like the 14.2% profit margin the company is pulling. So far so good. However, I have my concerns.

For one, even for a company that doesn't deal in "hard" assets or commodities, it trades at almost 4 times its book value. This is especially troubling when Equifax's form letters reference a phone number that isn't in service. When a company won't even put a proper number on its letters so people can call them and make needed changes, how responsive would the company be to anything else it should be doing? The same kind of issue impacts anyone who tries to lift a security freeze on the Net. Unless your date of birth is on file, you're out of luck trying to lift the freeze unless you go through a more difficult process.

Furthermore, I really don't like companies that try to be PR police on Wikipedia. While it isn't the only source I use and there's always room for shenanigans and pranks, Wikis are at least intended to be an unbiased display of facts. While Equifax is most likely going to stand the test of time and continue to turn a profit, I'd rather work with companies that don't seemingly employ shady tactics to make themselves look better.

Fifth Street Finance (NASDAQ: FSC) has had a checkered history. While some people would worry about the 12% dividend, my gut says that's small potatoes. But then I remember that despite the company's solid profitability, it has a history of payout ratios in the 180% range. That means that for every dollar of net income for Fifth Street Finance, it paid out $1.80. Needless to say, that even worries me. Add to that the fact that Fifth Street is trading at around 25 times earnings and I'm ready to drop it ASAP.

Granted, it may be a great company. It is solidly profitable, after all. But in my opinion, Fifth Street Finance is just too risky for what you get right now. I love high dividends, but I also like a good night's sleep and in this case they don't go hand in hand.

pongun has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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