Updated on September 24th, 2024 by Felix Martinez
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).
There are currently only 78 monthly dividend stocks. You can see the full list of monthly dividend stocks (along with important financial metrics such as dividend yields and price-to-earnings ratios) by clicking on the link below:
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 1.3% 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.
Business Overview
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 and aviation make up the bulk of the company’s EBITDA. The company’s strategy 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.
Growth Prospects
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 August 8th, 2024, the company released its Q2 results for the period ending June 30th, 2024. Revenues for the year grew by 5% (in constant currency) to $482.8 million, driven by a 15% increase in aerospace revenue, which offset a 12% decline in the manufacturing segment.
Adjusted earnings per share (EPS) fell to $0.59 from $0.74 last year, mainly due to higher operating and interest expenses, along with a 9% increase in the average number of shares. For fiscal 2024, management reaffirmed their guidance, expecting adjusted EBITDA to reach between C$600 million and C$635 million, with confidence in hitting the upper range. Based on this outlook, adjusted EPS could reach $2.27, excluding any one-time items. All other figures in the tables reflect GAAP standards.
The annual dividend rate of C$2.64 equals approximately $1.91 at the current CAD/USD exchange rate.
The payout ratio was 84% in FY2024, implying that dividend covered with earnings.
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.
Dividend Analysis
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$2.64 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 $1.96 per share in U.S. dollars, representing a high dividend yield of 5.2%. Exchange Income’s dividend growth has been stable and consistent over the long term.
Using projected 2024 earnings-per-share of $2.27, the stock has a dividend payout ratio of approximately 84%. 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 5.2% dividend yield, 3% annual EPS growth, and a low single-digit offset from a declining P/E multiple.
Final Thoughts
Exchange Income Corp’s high dividend yield and monthly dividend payments are immediately appealing to income investors such as retirees.
Related: 3 Canadian Monthly Dividend Stocks With Yields Up To 6%.
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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