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 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 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 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: 32.1% (five-year average)
- Cost of Equity: 10.0%
- Book Value Per Share: C$8.20
- Growth Rate: 3.05% (used 30-year U.S. Treasury yield as a proxy for long-term growth expectations)
Now that I have my assumptions, let’s plug 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)
- C$34.24 = C$8.20 + C$26.04
As a result, CI Financial is currently worth C$34.24 per share under current market conditions. With a share price of about C$13.50, there’s ample room for upside.
CI Financial’s Dividend Provides an Attractive Income Stream
For income-oriented investors, CIX pays a 5.2% dividend yield on an annualized basis. When taking a look at CIX’s historical dividend yield, you can see that it has been quite volatile:
At 5.2%, the current yield is around the middle part of the range, indicating that income-oriented investors are paying a fair price relative to yields they have been able to receive in the past.
What Do Analysts Think of CI Financial?
CI Financial has a Moderate Buy consensus rating based on four Buys and three Holds assigned in 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 are also willing to handle the stock’s volatility for the chance at solid capital appreciation should consider this stock. CI Financial is very profitable, with a high return on equity. In addition, analyst ratings and the excess returns valuation model suggest that the stock is undervalued.