Market Recovery: Is This Small High-Yield Stock a Buy Today?

Airlines have been crushed, and Exchange Income Corp. (TSX:EIF) was hammered along with the rest. Recently, the high-yield stock has doubled from its March lows. Is this small stock still a buy today?

| More on:
question marks written reminders tickets

Image source: Getty Images

At this point in the game, with all the economic uncertainty ahead, I am having a difficult time looking at small-cap stocks. There are some that still look rather attractive, but I am attempting to stick to the large-cap companies with relatively healthier dividends. The problem is, though, that some small-cap names have also been hit quite hard. They are starting to look very attractive as a result.

One stock that I have owned for a long time now is Exchange Income (TSX:EIF). I first bought this company when its shares were trading at around $15 a share years ago, owned it until it was trading above $40 a share, then watched it fall to around $12 a share at the depths of the crisis last month. At its current level of just under $30 a share, is it still a buy today?

Airline connections

Even before Air Canada’s (TSX:AC) disastrous Q1 earnings report, the airline industry was already a terrible sector. The global pandemic has decimated the industry. Planes have been grounded and travel restricted, making this a toxic investment for now.

The negative view towards airlines has probably, to some extent, been a factor in Exchange Income’s recent pain. The company is invested in a number of airline-related businesses that might suffer in the near term. The recently acquired after-market aviation equipment, for example, might be impacted, as might scheduled passenger flights. These are certainly vulnerable to the pandemic slowdown.

Its airline business has a strength, though, that makes this company more appealing than the traditional large airlines. Exchange Income operates primarily in northern communities. These communities are difficult to reach, making this airline an essential service. As a result, their flights are likely to be more stable than traditional airlines. The company also runs a medical airlift service. This service is indispensable in the current global situation.

Operational strengths 

Before the pandemic, Exchange Income reported its annual results. Revenue grew 11% year over year. EBITDA increased by 18%, and adjusted net earnings increased by 7%. These results helped the company increase its dividend by 4%, which leaves the current yield at about 8.5% at the time of this writing. 

The main problem

As is frequently the case in the age of low interest rates, the main issue with the company is its debt. Its acquisitions, while accretive, have left the company with a significant amount of debt. This debt load leaves the company susceptible to a prolonged downturn, potentially putting the generous dividend at risk should economic issues hit it more significantly than anticipated.

The bottom line

Exchange Income was cheap when it fell to its lows. If you like buying smaller stocks, you would have more than doubled your money if you bought it at that level. My issue is the fact that we are moving into a difficult economic period, possibly one of the worst in Canadian history. The company also has a substantial amount of debt, making it vulnerable to economic weakness.

Nevertheless, I have added slightly to my position in this company recently. Although my focus has been on large-cap dividend stocks, I think it is reasonable to invest a small amount in these smaller, slightly riskier names since the opportunity has arisen.

Exchange Income is a unique opportunity in the airline space due to its diversified business and unique model of operations. A small investment in this dividend payer is worth a shot at this time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kris Knutson owns shares of EXCHANGE INCOME CORPORATION.

More on Coronavirus

rail train
Coronavirus

Bull or Bear: Why Analysts Changed Their Tune on Aecon Stock

Analysts had been champing at the bit for the construction company, but the tides have turned.

Read more »

Biotech stocks
Coronavirus

Is Bellus Health Stock Still a Buy After 30% Earnings Jump?

The biotech continues to make progress on obtaining FDA approval for its chronic-cough therapy.

Read more »

grow dividends
Coronavirus

Goodfood Stock Likely to Double in 2022!

Goodfood (TSX:FOOD) stock has had a huge rise and fall in the last few years. But at $1.85 a share,…

Read more »

grow dividends
Coronavirus

Canfor Stock Pops 5% as Sales Climb 15% YOY

Canfor (TSX:CFP) stock remained positive about its future in the global lumber market after profits climb 15% year over year.

Read more »

edit Safety First illustration
Coronavirus

2 Crash-Proof TSX Stocks I’d Buy With $5,000

These two TSX stocks have proven they can handle this economic downturn and likely will continue to be safe far…

Read more »

TSX Today
Coronavirus

What to Watch on the TSX on Tuesday, April 26

Earnings continue to come out on the TSX today, including Air Canada (TSX:AC). Meanwhile, investors may want to continue watching…

Read more »

think thought consider
Coronavirus

Should Investors Buy Goodfood Stock Ahead of Earnings?

Goodfood (TSX:FOOD) stock dropped on Wednesday ahead of the company's earnings release. And it's unclear whether there will be anything…

Read more »

little girl in pilot costume playing and dreaming of flying over the sky
Coronavirus

Cargojet Stock Soars Higher, Is it Still a Buy?

Cargojet stock (TSX:CJT) jumped after its deal with DHL, but at today's prices is the airline company still a buy…

Read more »