2023-04-29 04:36:09 ET
Summary
- Fidelity National Financial currently offers a yield north of 5%, which is substantially higher than the stock's four-year average dividend yield of 3.4%.
- The dividend is well-covered and the company's recent track record of dividend hikes suggests it may continue to grow.
- Given the uncertainty in the housing market, Fidelity National Financial will likely continue to underperform and it may be worth waiting to initiate a position.
Investing Thesis
Shortly after the bell rang to end the trading day on Tuesday, Fidelity National Financial ( FNF ) announced that it would release its first quarter 2023 earnings after the close of trading on Wednesday, May 3. Those results should be of interest to dividend investors because a second consecutive disappointing quarter could present an appealing income opportunity if the stock's price drops in response to souring sentiment on Wall Street.
Back in February, the insurer's stock took a fairly substantial tumble after it reported disappointing fourth quarter earnings and revenue, dropping from $42.99 per share at the close of trading on February 21 to a low of $32.17 per share on March 17, before recovering slightly to about $35.40 as of this writing on the afternoon of April 28:
If we look at the stock's price performance over the past five years, we see that, with the exception of the Covid-19 crash in the spring of 2020, FNF has not traded at these prices since 2019:
Thanks to the fact that FCF has continued to hike its dividend each year for the past seven years, we see that, with the exception of a brief spike as the entire market crashed in response to the 2020 pandemic lockdowns, FCF is currently offering its highest-ever yield, just north of 5%:
As an income-oriented investor, this high yield intrigues me and I suspect that anything less than stellar numbers in next Wednesday's earnings release may nudge that yield up even higher. I decided to take a closer look at Fidelity National Financial and see a mixed bag of potential reasons to invest and reasons to remain wary of the company. In this article, I will discuss some of the pros and a few of the risks of investing in FNF from the perspective of a dividend growth investor.
Company Overview
For those readers unfamiliar with Fidelity National Financial, the Jacksonville-based company is a leading provider of title insurance and transaction services for the real estate and mortgage industries. FNF operates through three main business segments as well as a few smaller ancillary businesses. The three primary segments of Fidelity's operations are:
Fidelity National Title Group : As the company proudly proclaims on its investor relations welcome page , Fidelity "is the nation's largest title insurance company through its title insurance underwriters - Fidelity National Title, Chicago Title, Commonwealth Land Title, Alamo Title and National Title of New York - that collectively issue more title insurance policies than any other title company in the United States " The segment provides title insurance, escrow, and other title-related services to individuals, businesses, and government entities, maintaining a market share of over 30%.
Black Knight: The Black Knight segment provides technology and data solutions for the mortgage industry. The products and services Black Knight offers assist mortgage lenders and servicers to manage the loan lifecycle, from origination to servicing and default.
FNFV: Fidelity National Financial's venture capital and investment arm, FNFV invests in a variety of industries, with particularly significant concentrations in technology, healthcare, and financial services.
In addition to the three main segments listed above, FNF also operates several other businesses, notably restaurant franchising and human resources solutions.
Pros of Buying Fidelity National Financial
Some strong financials : Despite February's disappointing report, Fidelity National Financial has a solid financial position, with a market capitalization of over $9.6 billion and a debt-to-equity ratio of just 0.54 for the three months ending December 31, 2022. This indicates that the company has a healthy balance sheet and is well-positioned to weather the sort of economic downturns it is presently encountering.
Diverse revenue streams : The fact that Fidelity National Finance maintains a diverse portfolio of businesses, including its flagship title insurance operations, Black Knight's mortgage industry technology solutions, and FNFV's venture capital investments. This diversification helps to mitigate risk and provides the company with multiple sources of revenue.
Market leadership : The fact that Fidelity National Financial is a market leader in title insurance and related services, with a market share over 30% should be appealing to investors. The company's leadership position provides Fidelity National Financial with an important competitive advantage and helps to ensure that it remains a trusted partner for both real estate professionals and consumers. Name recognition goes a long way!
Growth potential : Fidelity National Financial has been expanding its business through strategic acquisitions and partnerships, which could lead to increased revenue and profits in the future. In March of 2018, FNF finalized the $1.2 billion acquisition of Stewart Information Services Corporation , a move that made the company the United States' largest title insurer. In 2019, FNF acquired the real estate auction firm Hudson and Marshall , thereby expanding the company's presence in the real estate market. In the fourth quarter of 2020, FNF acquired both FGL Holdings (a leading provider of fixed annuities and life insurance) and Real Geeks (a firm providing real estate customer management, which was integrated into Black Knight). More recently, FCF acquired TitlePoint (a web-based title search and analysis application for real estate agents) and several title agencies , including Security Title Insurance Agency and St. Louis Title (all in November of 2022)
Dividend payments : Dividend income is the primary reason I began looking at Fidelity National Financial in the first place. Although the company's not-quite twenty year history of dividend payments is somewhat shorter than some other companies, FNF has a solid track record of paying regular dividends to its shareholders, and has increased those dividends each year for the past seven:
As I discuss above, FNF currently offers a yield north of 5%, which is substantially higher than the stock's four year average dividend yield of 3.4%. Of course, a high yield can often mean that the dividend may be unsafe, so it is important to consider whether FNF's financial situation can sustain and hopefully hike its current payout. Right now, the dividend does look safe. Fidelity' payout ratio is a reasonable 32.78%, which suggests not only a safe current dividend but also leaves room for future hikes. Given the dividend's 14.30% growth rate over the past half-decade as well as the company's nearly two decade history of paying dividends, I would expect continued annual hikes as long as Fidelity continues to generate sufficient cash to cover the dividend. With a trailing twelve month cash flow payout ratio of 10.95%, Fidelity National Financial certainly looks capable of covering the dividend for the foreseeable future.
Potential Risks of Buying Fidelity National Financial
Real estate market risk: While there is some debate over whether or not the American housing market is a bubble about to burst , there is nevertheless a general sense that we may be entering a period of instability in the housing market. Since Fidelity National Financial is so heavily involved in and tied to the real estate market, any substantial downturn in that area could result in substantially reduced demand for the company's services and, as a result, FNF could experience lower revenues and profits. Indeed, FNF already appears to be encountering that very predicament. In the company's earnings call in February, Mike Nolan, Fidelity's CEO, admitted that some of the company's disappointing Q4 numbers owed to the fact that "[t]he housing market has been adjusting to the rapid rise in mortgage interest rates, which has resulted in a sharp slowdown in the residential purchase and refinance markets from the record levels experienced throughout 2020 and 2021." Between stubbornly high inflation rates impacting customer spending and uncomfortably steep mortgage rates preventing some potential homeowners from signing on the dotted line, the housing market may continue to exert a negative impact on FNF for some time yet.
Competition risk : Despite the company's status as a national leader in title insurance, Fidelity National Financial operates in a highly competitive industry, and faces stiff competition from other title insurers and real estate service providers seeking to make inroads into the market FNF currently dominates. Such increased competition could lead to a reduction in FNF's market share, thereby lowering pricing power, and reducing the company's revenues and profits.
Economic risk : It may go without saying for some readers, but Fidelity's business is highly sensitive to the vicissitudes of the broader economy, too. The widely-anticipated recession so many people expect to befall the economy could easily lead to reduced demand for real estate services , which could have an immediate and lingering negative impact on FNF's financial performance.
Acquisition risk : As I outline in the previous section, Fidelity National Financial has invested a tremendous amount of resources into acquisitions aimed at growing the company's core title insurance business as well as broadening the company's presence in technology and other ancillary business operations. While several of these acquisitions, including Black Knight, have proven to be solid engines driving Fidelity's business, the company's aggressive acquisition strategy carries the ever-present risk of adding a business that will fail to deliver the hoped-for benefits and possibly become a drag on future earnings.
Parting Thoughts
As a dividend investor, I am tempted to initiate a position in Fidelity National Financial as a potential investment at its present price because the company's relatively low payout ratio easily covers the stock's historically high dividend yield. With its recent history of annual dividend hikes and its even longer track record of paying dividends, I think FNF's dividend is safe and likely to grow at a similar rate (10%-13%) to what it has over the past five years. For dividend growth investors, this may be an opportunity to enjoy a high level of current income and the potential for better-than-average dividend growth moving forward. That said, I am inclined to wait until after next week's Q1 earnings announcement to make a decision. Given the state of the housing market, it is entirely possible that FNF will deliver another disappointing report and the stock's price could drop even further. If, as a result, the yield approaches 6%, I would say that the stock might be a buy. Until then, I rate it a hold...but one to pay particularly close attention to for any opportunity to buy the dip.
For further details see:
Fidelity National Financial Offers A Safe 5% Yield, But May Still Disappoint Investors