Tuesday, August 6, 2013

Exchange Income Corp

On my other blog I am today writing about regulations and capitalism...continue...

I do not own this stock Exchange Income Corp. (TSX-EIF, OTC-EIFZF). My opinion is that this is just another x-income trust company that is having a hard time getting good Dividend Payout Ratios. I think that the easy money has already been made from x-income trust companies and that for such a company to move on they will have to get their DPRs in line.

One of my blogger readers suggested this stock as one to review. There was an interesting article about this stock in the G&M in May 2013. This article suggested that the company had a hefty yield with an acquisition tailwind.

The current yield on this stock is 6.36% based on a stock price of $26.40. The dividend is increasing, but at a low rate of just 2.31% per year over the past 5 years. The increase since inception is much better at 14.72% over the past 8 years. Since it was an income trust and has changed to a corporation, the 5 year record might be closer to what it will do in the future. The last increase was for 3.7%.

Looking at what the yield might be in 10 and 15 years’ time if we use the 6.36% yield and a 2.31% increase per year, it could be at 8% and 9% at the end of these periods. If you do the calculation using a 3.7% increase you could have a dividend yield on your original investment of 9.2% and 11% at the end of these periods.

If you bought this stock from the inception, you would have earned some 17.05% per year with 7.94% per year from dividends and 9.11% per year from capital gains. Over the past 5 years the total return on this stock has been at 29.22% per year with 10.95% per year from dividends and 18.57% from capital gains.

However, the stock price has only grown slightly since 2011, with a growth closer to 2% per year. The dividends have been good with them close to 7.5% per year. That would give a total return close to 9.5% per year. A return on a dividend paying stock of over 8% is considered to be quite good.

There are a couple of reasons why the stock price might have stalled. One is that the Dividend Payout Ratio for earnings is far too high. The 5 year median DPR for earnings is 132%. The DPR for cash flow per share is more reasonable with a 5 year DPR of 67%.

There are a number of analysts following this stock and they tend to believe that the DPR for earnings will drop to around 95% this year and to around 75% next year. However, estimates are just that, estimates. The EPS for the first quarter was up, but only by some 2.4%. Analysts’ are expecting the EPS to rise some 42% in 2013. The first quarter is going in the right direction, but not nearly as strong as needs to be.

The thing is that a number of old income trusts are having a difficult time being corporations. Some have not managed to get the DPRs in line with what is expected of corporations. Some had tax pools that allowed them more time to do this. However, eventually they will have to get their DPRs in line with corporations.

I have a couple of such stocks of Pembina Pipelines (TSX-PPL) and Veresen Inc. (TSX-VSN) that are having the same problems. I have made good money on these stocks. However, they will not progress much currently if they cannot get their DPRs into good shape. Mostly this involves getting the EPS above the dividend levels.

Another reason for the stall in stock price is that the Return on Equity peaked in 2009 (although 2008 was not a good year.) The ROE was just 8.9% in 2012 and it is rather low.

It is obvious that not everyone thinks as I do. On this stock there are Strong Buys, Buys and Hold recommendations, with the consensus recommendation being a Buy. The 12 month stock price consensus is $31.80. This implies a total return of 26.82% with 20.45% and 6.36% from dividend. (However, I am dealing with the closing price on Friday, August 2, 2013. I notice that as of 3.32 today, this stock is down some 2.3%. The TSX is also down, but not nearly as much.) Another thing is that the above configuration of analyst’s recommendation is the most common one and is seen on most stocks.

When I look at insider trading, I get 1.2M of insider buying and $2.1M of insider selling. The majority of this buying and selling is by directors. It is interesting to note that insider ownership is basically only by directors and very little by anyone else. One director owns shares worth $42M and this is the biggest insider ownership. A couple of other directors own shares worth $5 to $6M.

The 5 year low, median and high median Price/Earnings Ratios are 13.82, 17.30 and 20.78. The current P/E ratio is 14.92 based on a stock price of $26.40 and 2013 earnings estimate of $1.77. This suggests a reasonable stock price.

I get a Graham Price of $23.15. The 10 year low, median and high median Price/Graham Price Ratios are 0.66, 0.71 and 0.77. The current P/GP Ratio on a stock price of $26.40 is 1.14. This test suggests that the stock price is relatively high.

The 10 year Price/Book Value per Share is 1.34 and the current P/B Ratio is 1.96 a value some 46% higher. This test suggests that the stock price is relatively high.

I cannot do properly a dividend yield test as the dividend yield has been declining as have all dividend yields on x-income trust companies. However, a Price/Cash Flow per Share test is good. The 10 year P/CF Ratio is 5.06. The current P/CF Ratio is 7.98 based on a stock price of $26.40 and 2013 estimates for CFPS of $3.31. This test shows that the current P/CF Ratio is some 58% higher than the 10 year median and therefore suggests that the stock price is relatively high.

The blogger proactive Investors has a positive report on this stock. The stock is talked about at Canadian Money Forum. One comment is about the high DPR.

What I do not like is the high DPR for earnings. I think that this needs to be gotten under control. My stock tests seem to imply that the stock price is relatively high. See my spreadsheet at eif.htm.

Exchange Income Corporation was created to invest in profitable, well-established companies with strong cash flows operating in niche markets in Canada and/or the United States and to distribute stable monthly cash dividends to its shareholders. The Company currently owns subsidiaries in two niche business segments, aviation and specialty manufacturing. Its web site is here Exchange Income Fund.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. See my website for stocks followed and investment notes. Follow me on Twitter or StockTwits.

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