Interest sensitive stocks have taken a beating since the election of Donald Trump. The market has made the assumption that his policies will stimulate growth, leading to rising interest rates and higher inflation. As a result, we have seen across the board declines in the share prices of REITs, utilities, and other dividend stocks.
But a few have bucked the trend. One of them is Exchange Income Corp., which I recommended to readers of my Income Investor newsletter just over a year ago at $26.89. It closed on Nov. 21 at $42.48. Here are the details.
Background: Winnipeg-based Exchange Income Corp. focuses on aerospace and aviation services and equipment, and manufacturing. The company uses a disciplined acquisition strategy to identify already profitable, well-established businesses that have strong management teams, generate steady cash flow and operate in niche markets. It has two operating segments: aviation and manufacturing. The aviation segment serves Northern Canada, while the manufacturing segment covers a number of sectors. This growth-by-acquisition company has added new businesses every year since 2011.
Stock performance: As mentioned, I recommended the company in November, 2015. The stock dropped below $22 during the market sell-off last winter but has since rallied dramatically and is now almost $15 ahead of its original recommended price. The yield has dropped accordingly, despite two dividend increases since the stock was recommended.
Recent financials: Third-quarter results continued to impress. The company reported a 6-per-cent increase in revenue to $224.6-million from $212.8-million in the same period last year. Net earnings came in at $20.6-million (72 cents a share), up from just under $16-million (64 cents) in the 2015 third quarter. On a per-share basis, that represented an increase of 13 per cent. Free cash flow in the quarter was $45.9-million, a 9-per-cent increase from the previous year. The payout ratio was 54 per cent of free cash flow less maintenance capital expenses.
For the first three quarters of fiscal 2016, the company reported a 57-per-cent increase in net earnings to $47.7-million ($1.70 per share, up 33 per cent), from $30.3-million ($1.28) in 2015.
Growth: The company continues to expand. During the quarter, it acquired a net total of nine aircraft for its leasing portfolio. It also completed the strategic acquisition of CarteNav for $17-million. CarteNav is a leading software developer providing intelligence, surveillance, reconnaissance and "situational-awareness" software services. Subsequent to quarter-end, Exchange Income completed the acquisition of Team J.A.S., a parts and maintenance repair services company that has specialized in Twin Otter aircraft for 30 years. The price was about $10-million (U.S.). Headquartered in Jacksonville, Fla., the company has expertise in an aircraft type that is new to EIC and will provide internal sourcing of parts for its existing fleet of Twin Otters.
Company president Carmele Peter said the balance sheet is strong "and well positioned to capitalize on further growth opportunities with no long-term debt or debentures maturing before 2019 and approximately $180-million of undrawn credit facility."
Dividend: The dividend is increasing its payout by 4.5 per cent this month, to $2.10 annually, for a yield of 5 per cent. Net earnings are well in excess of dividend payments, a financial position that makes me very comfortable.
Action now: My guidance to readers is buy, but consult your financial adviser before taking action. The yield is down from my original recommendation but is still very attractive. This small company is on the move.