VSI financial (EAST: CIX) (CIXX) is a potentially undervalued company that pays an attractive dividend. Moreover, it enjoys the support of analysts who see strong upside potential.
CI Financial manages, markets, distributes and administers investment funds.
CI Financial is trading at a steep discount
To value CI Financial, I will use the excess return model. This approach is more appropriate for financial companies as they tend to have volatile free cash flow.
As a result, trying to create FCF forecasts for them is hopeless. The excess returns model allows me to use historical numbers instead, which are actual results. There are a few steps to follow for this evaluation method.
First, you calculate a company’s excess returns. Then you calculate the terminal value. Add them up and you get your rating. Here’s how it works:
- Excess Return = (Average ROE – Cost of Equity) x Book Value per Share
- Terminal Value = Excess Return / (Cost of Equity – Growth Rate)
- Fair value = book value per share + terminal value
I will use the following assumptions for my calculations:
- Average ROE: 32.1% (five-year average)
- Cost of equity: 10.0%
- Book value per share: C$8.20
- Growth rate: 3.05% (using the 30-year US Treasury yield as a proxy for long-term growth expectations)
Now that I have my assumptions, let’s insert them into the formulas:
- C$1.81 = (0.321 – 0.1) x C$8.20
- C$26.04 = C$1.81 / (0.1 – 0.0305)
- CA$34.24 = CA$8.20 + CA$26.04
Therefore, CI Financial is currently worth C$34.24 per share under current market conditions. With a stock price around C$13.50, there is plenty of room for upside.
CI Financial’s dividend offers an attractive source of income
For income-oriented investors, CIX pays a dividend yield of 5.2% on an annualized basis. Looking at CIX’s historical dividend yield, you can see that it has been quite volatile:
At 5.2%, the current yield is in the middle of the range, indicating that income-oriented investors are paying a fair price compared to the returns they have been able to achieve in the past.
What do CI Financial analysts think?
CI Financial has a moderate buy consensus rating based on four buys and three freezes assigned over the past three months. The average CIX price target of C$21.79 implies 62.5% upside potential.
Who should invest in CI Financial?
Investors who are income-oriented but also willing to manage the volatility of the stock to have the opportunity for strong capital appreciation should consider this stock. CI Financial is highly profitable, with a high return on equity. Additionally, analyst ratings and the excess return valuation model suggest the stock is undervalued.
Disclosure
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
