Down 70% in 2022, is this high-yielding stock a buy?

While lease-to-own (LTO) might not be the most glamorous business model, that doesn’t mean that a leading LTO company like Rent-A-Center (RCII 8.07%) may not be a good investment.

Rent-A-Center mainly rents durable household goods such as furniture and appliances to consumers on a leasing basis, as well as electronic devices such as computers, tablets, smartphones, etc. These leases typically last 12 to 24 months, and the company makes money because the total amount paid during the lease is more than what consumers would have paid if they had purchased the items directly. The company has more than 2,400 locations in North America, including 466 franchise stores and 123 locations in Mexico.

The Rent-A-Center Option

Although LTO customers ultimately pay higher prices in the long run, they otherwise could not afford these purchases because they do not have the credit to finance them elsewhere. Rent-A-Center reports that about 40% of US consumers have below average credit and about half of consumers have less than $2,000 in their checking account. Customers may return merchandise at any time without penalty or charge.

Is this the ultimate countercyclical investment?

Shares of Rent-A-Center are down 70% year-to-date. The company downgraded its outlook and said the end of COVID-related stimulus payments and rising inflation have left customers with less money in their pockets.

But there are several other emerging trends that should benefit the company. First, many LTO purchases are for basic necessities rather than discretionary items. For example, if someone needs a new refrigerator or a new washing machine, LTO offers a viable option.

Second, if the economy deteriorates and consumers continue to feel the pinch of inflation, more customers who may not have considered Rent-A-Center before may become interested in it for the first time. For this reason, Bank of America Analyst Jason Haas calls LTO “the countercyclical sub-sector you should own” and assigns a price target of $38 to Rent-A-Center, which is about a 90% premium to the current stock price. his action.

Finally, many retailers do not currently offer LTO, but in this situation others might consider partnering with Rent-A-Center to maintain sales, which the company sees as an “opportunity.” important untapped”.

Build a virtual presence

While Rent-A-Center may benefit from these countercyclical trends, it is also striving to improve its own position by becoming more involved in virtual LTO sales by increasing its online presence. It acquired Acima, a leading LTO platform, in 2021 to further leverage this strategy. The company has a comprehensive website where customers can choose items like washer and dryer sets, set up a payment plan, and get next day delivery.

This is a compelling option for Rent-A-Center’s customer base and helps differentiate it from peers who do not offer virtual LTO. Additionally, it can help defend Rent-A-Center sales against buy now, pay later (BNPL) options. While BNPL companies like Affirm are a threat, Rent-A-Center is also somewhat insulated from it due to its large physical footprint and because it does not report payment history to credit bureaus.

Overall, I think Rent-A-Center’s omnichannel presence serves it well and puts it in front of as many potential customers as possible.

Cheap with a big dividend

After falling 70% year-to-date based on the aforementioned concerns, shares of Rent-A-Center now trade at a modest 16 times this year’s earnings and less than four times projections for next year’s profits, which is incredibly cheap.

The company clearly has challenges ahead, as noted above, but these appear already priced into the stock price and do not account for the company’s countercyclical potential. Meanwhile, Rent-A-Center pays a very attractive dividend which currently yields 6.7%.

Is Rent-A-Center a purchase?

Rent-A-Center faces some challenges and lowered expectations, but at this point it looks like those prospects are already priced into the stock price. The company can benefit from some counter-cyclical economic trends in the short term, and in the long term, it strives to differentiate itself as an omnichannel LTO provider with extensive virtual business.

With that in mind, plus a dividend yield approaching 7%, Rent-A-Center looks like a solid buy for risk-tolerant long-term investors.

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Michael Byrne has no position in any of the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.