Updated on May 25th, 2021 by Bob Ciura
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 which 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 above 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 55 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 S&P 500 Index yields just 1.4% right now, on average. By comparison, Exchange Income has a yield 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 that its payout is sustainable. Fortunately, the dividend payout appears sustainable, meaning the stock appears attractive for 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, 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 company 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 20 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
Growth has been strong in recent years, but since 2020 the company has been challenged by the coronavirus pandemic and the resulting impact on the global aviation industry. On May 13th, 2021, Exchange Income reported its Q1–2021 results for the quarter ended March 31st, 2021. Revenue came in at $248.5 million, a 2% decline year–over–year (in constant currency).
This was due to a decrease of $14.4million in the Aerospace & Aviation segment, which was partially offset by an increase of $9.34 million in the Manufacturing segment. Though recovering, the company’s aviation operations continue to suffer as a result of COVID–19. Despite this, total sales were not that catastrophic, as its niche operations include medevac, seismic support, and other services usually contractually secured by governmental entities.
Adjusted EPS was $0.25, against only $0.05 in Q1–2020, due to the severe environment the company went through in the early months of the pandemic outbreak. Despite the challenges, the company’s adjusted free cash flow per share remains robust, at $0.97.
Including maintenance expenses, this figure was $0.45 during the quarter, a massive improvement from the $0.058 last year. As a result, the payout ratio to free cash flow currently stands at 104%, implying that dividend coverage will soon normalize. Management has assured investors that the company remains committed to its dividend, as was the case during the harsh 2020, and it expects a further recovery in the company’s results.
We expect FY2021 EPS of $2.20, assuming partial recovery of the company’s aviation business. We have set our estimated 5-year compound annual growth rate of adjusted EPS to 7%, as the company’s bottom line gradually recovers in a post–COVID–19 world.
We retain our dividend-per-share growth projections at around 4% during that period, slightly lower than the company’s historical (Canadian) average. This incorporates some lag in its financials amid the somewhat slow recovery from the pandemic conditions.
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 14 times since 2004, and it is impressive that the company was able to maintain the dividend last year, even during the pandemic.
Source: Investor Relations
Today, the annualized dividend payout stands at $2.28 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 $1.89 per share in U.S. dollars, representing a high dividend yield of 5.8%. Exchange Income’s dividend growth has been stable and consistent over the long term.
Using projected 2021 adjusted earnings-per-share of $2.20, the stock has a dividend payout ratio of approximately 82%. This means the current dividend payout is covered by underlying earnings, albeit without much of a cushion.
We view the stock as slightly overvalued. From a total return perspective, we see potential for high single-digit total returns on an annual basis moving forward. This will consist of the 5.8% dividend yield, 7% 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.
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.
