A proven way to beat the broader market and major equity indices is by investing in dividend-paying companies that are undervalued and trade at a discount. Value investing is a popular strategy, as it allows you to buy stocks that are priced below their intrinsic value, providing you with a margin of safety.
Popularized by Wall Street stalwarts such as Warren Buffett and Benjamin Graham, the margin of safety is the difference between a company’s intrinsic value and its current share price, which reduces downside risk and offers massive upside potential on the rebound.
What is Exchange Income?
Valued at a market cap of $2.28 billion, Exchange Income is a diversified and acquisition-oriented company. It focuses on opportunities in segments such as aviation, aerospace, and manufacturing. Here, it invests in well-established companies that operate in niche markets and deliver consistent profits.
As Exchange Income is diversified across a number of companies in its two business segments, its cash flows are resilient across market cycles. This model has allowed Exchange Income to maintain dividends in the last 18 years, which included economic downturns, such as the financial crisis and the COVID-19 pandemic.
Exchange Income Corp went public back in 2004 and was valued at a market cap of just $8 million. So, in the last 19 years, it has returned 20% annually after adjusting for dividends, which is quite exceptional. Despite these outsized gains, EIF stock currently offers shareholders a tasty dividend yield of 4.75%.
Since its IPO, or initial public offering, Exchange Income has deployed $1.24 billion on 16 standalone acquisitions and $293 million on 16 tuck-in acquisitions. The primary goal of a tuck-in acquisition is to fill gaps or enhance current operations rather than expand into new markets. EIF has also allocated over $1 billion towards organic growth opportunities via capital expenditures in this period.
The company has increased sales from $1.2 billion in 2018 to over $2 billion in 2022. It paid investors $68.5 million in total dividends in 2018, and this figure rose to $97.5 million in 2022. In the last four years, an expansion of profit margins and cash flows has also allowed EIF to reduce its payout ratio from 60% to 55%.
What’s next for EIF stock price and its investors?
Priced at 14.9 times forward earnings, EIF stock is really cheap, given its forecast to increase the bottom line by 11.5% annually in the next five years. It ended Q1 with $1.8 billion in long-term debt and less than $100 million in cash.
However, its robust cash flows and a low payout ratio allow Exchange Income to reinvest in growth, service its debt and pursue accretive acquisitions. For instance, despite a challenging macro environment in 2022, it increased free cash flow by 36% to $332 million.
Exchange Income is forecast to increase sales by 17.5% to $2.42 billion in 2023 and by 7.9% to $2.6 billion in 2024. Due to its compelling financial metrics, EIF stock is trading at a discount of 20% to consensus price target estimates.