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?
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.
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.