Investing in undervalued dividend stocks is a great strategy. Generally, a stock is cheap when it is trading lower than its intrinsic value, which suggests it should generate outsized returns when investor sentiment improves. Moreover, a stock’s dividend yield and share price are inversely related. So, investing in a beaten-down dividend stock can help investors benefit from a high yield, too.
One such cheap or undervalued TSX dividend stock is Exchange Income (TSX:EIF). Valued at a market cap of $2.1 billion, this small-cap stock trades 17.5% below all-time highs, increasing its dividend yield to 5.8%.
Let’s see why I expect Exchange Income stock to deliver market-beating gains in the next 12 months (and more).
The bull case for Exchange Income stock
Exchange Income’s operating segments are strategic business units that offer different products and services. It has two operating segments that include:
Aviation Services & Aerospace
This business consists of essential air services such as fixed-wing and rotary-wing operations. It provides essential services to remote communities, primarily in northern Canada. A majority of the remote communities are not accessible by ground transportation for several months each year, making Exchange Income’s airline services a vital link in these regions.
The Aerospace business line provides customized and integrated special mission aircraft solutions to governments globally. These services include mission systems design and integration, aircraft modification, software development, logistics, and in-service support.
The aircraft sales and leasing business includes aftermarket aircraft, engine, parts sales, and aircraft and engine leasing services.
Manufacturing
Here, Exchange Income’s environmental access solutions business is Canada’s largest provider of temporary access solutions. Its multi-story window solutions business includes the designing, manufacturing, and installing the exteriors of residential and mixed-use high rises. Finally, it has a precision manufacturing and engineering business providing services across industries in North America.
We can see that Exchange Income has a diversified line of businesses, allowing it to generate stable cash flows across business cycles. As its cash flows are predictable, Exchange Income pays shareholders an annual dividend of $2.64 per share, indicating a yield of almost 6%.
Moreover, these payouts have risen by 7% annually in the last 19 years, showcasing the resiliency of its business model.
Exchange Income pays shareholders a monthly dividend and has maintained its payouts for almost two decades. Its conservative approach to balance sheet management and a diversified portfolio of subsidiary companies have meant Exchange Income’s distributions have totalled $750 million through 2022.
Since November 2003, EIF stock has returned 2,570% to shareholders after adjusting for dividends. In this period, the TSX index has gained just 351%.
What’s the target price for EIF stock?
Exchange Income continues to grow at an enviable pace, despite a sluggish macro environment. Analysts expect the company to increase sales from $2.06 billion in 2022 to $2.76 billion in 2024. Its adjusted earnings are forecast to improve from $3.13 per share to $3.36 per share in this period.
So, priced at 13.6 times forward earnings, EIF stock is very cheap, given its earnings are forecast to grow by more than 15% annually between 2024 and 2027.
Analysts remain bullish and expect EIF stock to surge over 40% in the next 12 months.
