2023-12-14 10:30:00 ET
Summary
- Investors Title Company's performance is closely tied to the housing market and transaction volume.
- Q3 and 9M 2023 results show a decrease in transaction volume, impacting the company's financials.
- Despite the weak year, Investors Title pays a generous dividend and has a strong balance sheet.
Introduction
I have always liked Investors Title Company (ITIC) as I consider property title insurance to be a low-risk business . That's not just a personal impression: the total amount of provisions for claims is usually just a fraction of the total amount of the premium income. But of course this also means ITIC's performance is closely tied to the housing market and the amount of transactions as a property owner and/or mortgagee only need to insure the title upon a transaction. This also means that when mortgages rates are high and the total amount of transactions is low, ITIC's performance will be suffering.
2023 will be a relatively weak year for ITIC
Looking at the Q3 and 9M 2023 results, the impact of the lower transaction volume on the real estate markets is very clear. The company reported a 25% lower amount of net premiums written , but fortunately this also means the total commission payable to agents came in lower as well. The income statement below shows a total revenue of $61.4M of which the majority is obviously generated by the title insurance premiums. That being said, ITIC is slowly benefiting from the increasing interest rates as its investment portfolio is doing pretty well. The total amount of interest and dividends has doubled compared to the same quarter of last year and that definitely helped to mitigate the impact of the lower transaction volumes.
The total amount of operating expenses did decrease by just over $15M, mainly thanks to a lower commission expense and a slightly lower personnel expense in addition to lower 'other' expenses as well. This resulted in a pre-tax income of $8.6M and a net profit of just under $7.1M. As there are just under 1.9M shares outstanding, the net profit per share was $3.75.
Looking at the 9M 2023 results, the company generated an EPS of $8.37 which is only slightly lower than the $8.63 in 9M 2022 but this could be explained by the $16.5M investment loss recorded in the first nine months of last year. Excluding that investment loss, ITIC's pre-tax profit would have been almost 80% higher.
Investors Title pays a quarterly dividend of $0.46 per share but also has a habit of paying a very generous dividend in the final quarter of the year when it has a better idea of its financial results for the year. Earlier this quarter, ITIC announced a special dividend of $4.00/share which will bring the annualized dividend to $5.84 per share and this represents a dividend yield of 4%. Not bad in what arguably is a very weak year for mortgage and real estate transactions. Additionally, let's not forget the full-year EPS will likely come in at around $11-11.5/share (barren any unforeseen surprises in the final quarter of the year) which means the payout ratio is approximately 50%.
The remainder of the profit is retained on the balance sheet and as of the end of September, the company had a total book value of $252.7M representing almost $134/share. This will drop by the end of this year as the dividends payable in Q4 will likely be higher than the EPS.
Goodwill and intangible account for $8.78 per share which means the tangible book value per share is roughly $125 and I expect a year-end TBVPS of around $123/share after accounting for the special dividend.
The company maintains a portfolio of securities and at the end of September, it had about $65M in debt securities (marked to market as they are held on an 'available for sale' basis) and just under $32M in equity securities. Those are also marked to market as the original cost basis of the securities is just $19.4M.
Additionally, ITIC has almost $104M in short-term investments which mainly consist of money market accounts invested in short-term funds, US Treasury Bills and commercial paper.
Investment thesis
Given the low-risk nature of the title insurance business, I am fine paying 13 times earnings during a downcycle. As a reminder, the EPS in 2022 and 2021 was respectively $12.60 and $35.38, but both years were impacted by substantial changes in the investment portfolio. Adjusting the EPS for those changes, the adjusted EPS in 2022 and 2021 would have been approximately $25.2 and $29.17/share.
And this makes ITIC one of my preferred vehicles to bet on lower interest rates and a higher transaction volume on the real estate markets. I currently have no position in ITIC but will be building my position in the next few weeks and months.
For further details see:
Investors Title Company: Call Option On Lower Interest Rates (And More Home Sales)