Updated on March 7th, 2023 by Nikolaos Sismanis
The industrial aerospace industry is not well-known for high dividends or even dividend growth, both in the U.S. and Canada. Exchange Income Corporation (EIFZF) is a unique Canadian business that acquires companies in the Aerospace & Aviation and Manufacturing sector.
The acquisition and growth strategy of Exchange Income has allowed the company to reward shareholders with regular dividend increases since its IPO. Combined with the high dividend yield of nearly 5%, this stock should pique the interest of any income investor.
Beyond its high dividend yield, the stock is also quite unique because it pays monthly dividends instead of the traditional quarterly distribution schedule. Monthly dividend payments are highly superior for investors that need to budget around their dividend payments (such as retirees).
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Exchange Income Corporation’s high dividend yield and monthly dividend payments are two big reasons why this company stands out to prospective investors.
This is especially true considering the average S&P 500 Index yields just 1.4% right now. By comparison, Exchange Income has a yield of more than three times the average dividend yield of the S&P 500.
That said, proper due diligence is still required for any high-yield stock to ensure its sustainable payout. Fortunately, the dividend payout appears sustainable, making the stock attractive to income investors.
Exchange Income Corporation engages in aerospace and aviation services by offering scheduled airline and charter services, emergency medical services, after-market aircraft & engines, and pilot flight training services.
Additionally, the company is invested in manufacturing window wall systems used in skyscrapers, vessels, and other industrial purposes.
Finally, Exchange Income also owns telecom towers, which it leases to America’s and Canada’s major telecom providers. The company generates just over $1 billion in annual revenue and is based in Winnipeg, Canada.
The corporation has two operating segments: Aerospace & Aviation and Manufacturing.
Source: Investor Relations
Aerospace & Aviation make up the bulk of the company’s EBITDA. The strategy of the company is to grow its portfolio of diversified niche operations through acquisitions to provide shareholders with a reliable and growing dividend.
The companies acquired are in defensible niche markets, and EIC has made over 33 acquisitions since its inception in 2004.
Acquisition candidates must have a track record of profits and strong, continued cash flow generation with committed management focused on building the business post-acquisition.
Exchange Income’s results lagged in 2020 due to the negative impacts of COVID-19 on the aviation industry. Since then, the company has not only recovered but has also proceeded to achieve new top and bottom-line records.
On February 23rd, 2023, Exchange Income reported its full-year results for the period ending December 31st, 2022. Revenues increased by 46% (in constant currency) to a record high of $1.51 billion.
The increase in revenues was driven by the Aerospace & Aviation and manufacturing segments, whose revenues grew to $982 million and $530 million, respectively. In fact, both segments’ revenues hit an all-time high, having recovered from their depressed levels during the midst of the pandemic and then some. The improvement was driven by strong demand across the board.
Earnings-per-share for the year was $2.01, 47.8% higher on an FX-neutral basis. U.S.-based investors experienced a smaller increase due to the deprecation of the CAD against the USD. Regardless, earnings growth was driven by higher revenues and margin maintenance, offset by a higher share count driven by shares issued to fund last year’s acquisitions.
The payout ratio was 89% in FY2022, implying that dividend coverage has now resumed.
For fiscal 2023, management expects a new all-time high adjusted EBITDA of between $510 million and $540 million. Based on this, we assume an earnings power of $2.60 per share, excluding any extraordinary items.
We have set our estimated 5-year compound annual growth rate of adjusted EPS to 3%, as much of the company’s post-pandemic recovery has now taken place.
We retain our dividend-per-share growth projections at around 2% during that period, slightly lower than the company’s historical (Canadian) average. The lower dividend growth rate will improve the dividend’s safety over the long term, ensuring adequate dividend coverage.
As with many high-yield stocks, the bulk of Exchange Income’s future expected returns will come from its dividend payments. Management has been committed to increasing the dividend and rewarding shareholders, and they have done so since inception.
The cash dividend payment has increased 16 times since 2004, and it is impressive that the company was able to maintain the dividend even during the pandemic.
Source: Investor Relations
Today, the annualized dividend payout stands at C$2.52 per share annually in Canadian dollars. Of course, U.S. investors need to translate the dividend payout into U.S. dollars to calculate the current yield.
Based on prevailing exchange rates, the dividend payout is approximately $1.85 per share in U.S. dollars, representing a high dividend yield of 4.9%. Exchange Income’s dividend growth has been stable and consistent over the long term.
Using projected 2023 earnings-per-share of $2.60, the stock has a dividend payout ratio of approximately 71%. This means underlying earnings cover the current dividend payout with a decent cushion.
We view the stock as slightly overvalued. From a total return perspective, we see potential for mid-single-digit total returns on an annual basis moving forward. This will consist of the 4.9% dividend yield, 3% annual EPS growth, and a low single-digit offset from a declining P/E multiple.
Exchange Income Corp’s high dividend yield and monthly dividend payments are immediately appealing to income investors such as retirees.
This analysis suggests that the company’s dividend is safe, as measured by the non-GAAP metric Free Cash Flow less Maintenance Capital Expenditures.
The company appears slightly overvalued on a price-to-earnings basis. At the same time, the company has a solid total return projection. As a result, Exchange Income Corporation appears to be a good stock pick for income investors, but total returns are not particularly impressive given the current overvaluation.
Don’t miss the resources below for more monthly dividend stock investing research.
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