Historically, FN has been a solid choice for income with modest growth.
However, I'm uncertain about the effect (i.e. headwind? tailwind?) of the current and near-future situation where people will have to renew their mortgages at higher rates, potentially leading to an increased number of defaults.
Is it a Buy, Hold or Sell?
Or is a Canadian bank stock (e.g. RY or TD) a better choice at this time for overall return?
Thanks in advance for your always helpful advice.
FN is an alternative mortgage lender, basically. It makes money from the difference in what it makes on its investments (mortgages) minus how much its funding (GICs, deposits, other) costs. This is the interest margin, and then any losses on loans are deducted from this. In an uncertain economy losses can increase. But, also, competitors (banks) tend to get more conservative in such an environment, so companies such as FN can see more potential business, which is a bit of an offset to higher losses. As mortgages renew FN should benefit a little, as there is typically a lag between increases in funding costs and mortgage rates. But rates for both vary, and FN essentially has to monitor input/output carefully all the time. Also, of course, at higher rates homeowners are more likely to get into trouble covering their mortgages. FN shares are very cheap, like the banks. It has been consistently profitable, even during the 2008 financial crisis it managed to grow earnings. We think it can be bought, for income primarily, but it is a relatively small company. Banks, with a far more diversified business mix and hugely larger, are still probably 'safer' overall.