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Intact Financial Stock Appears Overvalued, but Analysts are Bullish
Stock Analysis & Ideas

Intact Financial Stock Appears Overvalued, but Analysts are Bullish

Story Highlights

Intact Financial is a solid company, but it appears to be trading at a premium relative to the excess returns model and its historical dividend yield. Nevertheless, analysts have a very positive outlook on the company, as they expect further upside potential.

Intact Financial Corp (TSE: IFC) is a Canadian property and casualty insurance company.

The company distributes insurance under the Intact Insurance brand through a network of brokers and a wholly-owned subsidiary, BrokerLink, and directly to consumers through belairdirect. Most of the company’s direct premiums are written in the personal automotive space.

IFC’s share price is up roughly 12% year-to-date and up approximately 1.5% in the past year (not including dividends). Therefore, it may be overvalued at the moment.

IFC’s Valuation Seems Stretched

To value Intact Financial, I will use the excess returns model. This approach is more appropriate for financial companies because they tend to have volatile free cash flows.

As a result, trying to create FCF forecasts for them is ineffective. The excess returns model allows me to use historical numbers instead, which are actual results. There are a few steps to follow for this valuation method.

First, you calculate a company’s excess returns. Next, you calculate the terminal value. Add them up, and you get your valuation. 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: 12.5% (five-year average)
Cost of Equity: 9.0% (value taken from Finbox)
Book Value: C$82.16
Growth Rate: 3.1% (used 30-year Government of Canada bond yield as a proxy for long-term growth expectations)

Now that I have my assumptions, all I have to do is plug them into the formulas:

C$2.88 = (0.125 – 0.09) x C$82.16
C$48.81 = C$2.88 / (0.09 – 0.031)
C$130.97 = C$82.16 + C$48.81

As a result, Intact Financial is currently worth $130.97 per share under current market conditions. With its current share price near C$184, the stock appears overvalued.

Historically-Low Dividend Yield

For income-oriented investors, IFC pays a 2.2% dividend yield on an annualized basis. When taking a look at IFC’s historical dividend yield, you can see that it has trended downwards:

At 2.2%, the current yield is on the low end of the range, indicating that income-oriented investors are paying a premium relative to yields they have been able to receive in the past.

Analyst Recommendations

Intact Financial has a Strong Buy consensus rating based on nine Buys assigned in the past three months. The average Intact Financial price target of C$213.22 implies 15.8% upside potential.

Final Thoughts

Intact Financial is a solid company but appears to be trading at a premium relative to the excess returns model and its historical dividend yield. Nevertheless, analysts have a very positive outlook on the company, as they expect further upside potential.

Disclosure

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