So far this year, Rent-A-Center Inc. (RCII, Financial) has not had a good year. We could blame the generally bad economic situation, but I also think the company's 2020 acquisition of Acima is partially to blame, as it is still wreaking havoc on Rent-A-Center's financials to this day.
However, one result of the share price declines has been a steadily rising dividend yield; the company's dividend yields 6.92% as of this writing. Thus, could this stock be a good dividend income play?
About Rent-A-Center
Rent-A-Center describes itself as “lease-to-own provider" operating in the United States, Puerto Rico and Mexico. In its 10-K for 2021, it says, “We provide a critical service for a large portion of underserved consumers by providing them with access to, and the opportunity to obtain ownership of, high-quality, durable products via small payments over time under a flexible lease-purchase agreement with no long-term debt obligation.”
An Association of Progressive Rental Organization (aka APRO) publication on the rent-to-own industry explains this market better than I can: “What distinguishes rent-to-own from a retail credit sale is the term 'rent.' There is no interest charged to consumers, no credit checks involved and customers can return the merchandise at any time for any reason without penalty. This no-obligation, no-debt feature is the cornerstone of rental-purchase. It's easy, it's safe and it's hassle-free as free replacement, repair and delivery are included.”
Rent-A-Center targets lower-income consumers. Its annual report cites data explaining that consumers with credit scores below 650 (aka "subprime" borrowers) make up 25% of the U.S. population and that 40% of American consumers have incomes below $50,000; these customers are its target market.
It has two key segments (the first two on the below list) and three secondary segments:
- Rent-A-Center: At the end of the second quarter, Rent-A-Center had 1,850 locations that generated revenue of $490.2 million. This is the original business, founded in 1986. It is headquartered in Plano, Texas and has a market cap of $1.22 billion.
- Acima: This is a company that Rent-A-Center acquired in December 2020 for $1.27 billion in cash and 10.80 million shares valued at $377 million. It generated $530.2 million in revenue in the most recent full fiscal year. Acima complements the original business by providing a virtual sales channel as well as staffed and unstaffed kiosks inside third-party retailers.
- Mexico: The Mexico segment comprises 123 company-owned stores in Mexico. It contributed $16.7 million to second-quarter revenues.
- Franchising: These are independently owned stores using the Rent-A-Center, ColorTyme or RimTyme trade names; the 457 stores in this segment generated $34.2 million in second-quarter revenue.
- Corporate: This is the company's corporate structure and makes no revenue contribution.
Competition
The APRO same report I mentioned above points out there are some 9,200 rent-to-own stores in the United States, Canada and Mexico; whichever ones the company doesn't own, we can assume are the competition. In addition, Rent-A-Center competes with retail furniture stores as well, those that sell rather than rent or lease.
All told, there appears to be extensive competition in the market. The company does not indicate what level of competition or which names provide the greatest competition. One competitor that is both publicly traded and in the furniture rent-to-own category is The Aarons Company Inc. (AAN, Financial). It has about half the annual revenue of Rent-A-Center.
On a broader basis, this chart from the 10-K indicates the company has outperformed key benchmarks in the past five years:
The only competitive advantage it lists is its “proprietary decisioning algorithm, our e‑commerce platform and other proprietary technologies that we currently have or may develop in the future, including the Acima ecosystem.”
Fundamentals summary
Now that we have an idea of the company's operations, let's take a look at its fundamentals.
Rent-A-Center gets a reasonably high GF Score of 81 out of 100, although its financial strength and GF Value rankings are low. Its best performance is from the momentum rank.
Financial strength
Despite lots of red bars on the financial strength table, Rent-A-Center still gets a 5 out of 10 ranking overall:
Part of the low fianancial strength is due to the acquisition of Acima. That pushed its long-term debt from $190 million to $1.57 billion in one year (the company has no short-term debt).
Acima has allowed Rent-A-Center to more than double its revenue in the second quarter of this year. It should also give the company more leverage in negotiating with suppliers.
However, that debt also weighs on the profitability, with the weighted average cost of capital (WACC) at 11.81% and the return on invested capital (ROIC) at 3.35% indicating the company is destroying shareholder value.
Profitability
Rent-A-Center receives a decent 7 out of 10 ranking for profitability because of its operating margin, Piotroski F-Score, the trend of its operating margin, its consistency of profitability and business predictability rank:
Its operating margin is better than 60% of the 1,038 companies in the industry:
The Piotroski F-Score is 6 out of 9, which is in the safe range.
Turning to the consistency of its profitability, we see general consistency with the exception of 2016:
The below chart showing revenue and Ebitda helps explain why the company receives a low score for business predictability:
Growth
The company gets another 7 out of 10 ranking for growth:
The three-year growth rates for revenue, Ebitda and earnings per share without non-recurring items are all exciting. However, keep in mind these gains are because of its acquisition of Acima in late 2020. Expect them to level out in coming years.
In previous charts, the 10-year rates showed deep dives in 2016 before the company regained its footing. However, if we look at five-year charts, we get a more consistent growth trajectory in recent years. Here’s a five-year chart of Ebitda:
As shown above, predictability is low. There’s not much predictability about free cash flow over the past decade either:
Dividends and share repurchases
One of the key selling points of Rent-A-Center is the high dividend yield, thanks to the slumping share price. As of this writing, the dividend yields 6.92%, based on the closing price of $19.70 on Nov. 2.
Looking at the next line, the dividend payout ratio is obviously concerning. To make sense of it, we must start with the Acima acquisition and the 10.8 million new shares issued in the deal. Those shares were issued on or around Feb. 17, 2021; in the remainder of the calendar year it bought back 7.9 million of them. I suspect that there may be some double counting that inflates the payout ratio due to the way the accounting structure is set up.
Valuation
Rent-A-Center gets a low rating for its GF Value rank because of the relationship between its share price and the GF Value chart. The GF Value rank of 4 out of 7 comes from the GF Value chart showing the stock as "significantly undervalued." Based on a historical study by GuruFocus, stocks with a similar GF Value chart have tended to underperform in the past.
The price-earnings ratio and the PEG ratio suggest fair to modest overvaluation:
The long, rapid price decline looks ominous, and while it has been affected by the market slump, its share price began slipping in August 2021, well before the full market slump. Then again, the S&P 1500 Composite Specialty Retail Industry Index also began retreating before the broader market and, getting even more specific, competitor Aarons also began its slide even earlier:
Gurus
Five gurus held positions in Rent-A-Center's common stock at the end of the second quarter according to their 13F and mutual fund filings The three with the largest stakes were Hotchkis & Wiley, Jim Simons (Trades, Portfolio) of Renaissance Technologies and Chuck Royce (Trades, Portfolio) of Royce Investment Partners.
Institutional investors hold 82.12% of the common shares, while insiders own 7.85%. Acima founder Aaron R. Allred owns the largest position with 2,257,393 of the 4.64 million insider shares.
Conclusion
The furniture rental industry began to feel the bear market sooner than most others, and now companies like Rent-A-Center have deeply depressed share prices, but that's not the only problem for Rent-A-Center. It is also struggling under taking on too much debt for an acquisition. That would certainly be a problem for impatient investors, but good for dividend investors who can look past the current bad situation, I believe the company has the potential to recover in the long-term. In the meantime, the dividend is attractive.
