Stock Analysis & Ideas

# Why CI Financial Stock is Likely Very Undervalued

Story Highlights

CI Financial may be presenting investors with an interesting opportunity to receive an attractive dividend while waiting for the share price to climb to its fair value, which, based on my calculations, could be much higher than its current market price.

CI Financial (TSE: CIX) (CIXX) is a potentially-undervalued company that pays out an attractive dividend. In addition, it has 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 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.

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