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Diamond Hill Investment Group: Dividend Continues At 8%; 7x P/E And 41% Net Cash Make Company A Value Buy


  • 8% Dividend Yield which is extremely attractive.
  • 4Q20 Net Inflow of $900mn into Diamond Hill’s funds.
  • Reported EPS in 4Q20 up 13.8% YoY.
  • As of 2020, net cash directly held by Diamond Hill was 41% of market cap.
  • Stock repurchases of 5% of shares outstanding in 2020.

8% Dividend Yield, 7x ex-cash P/E, 9% FCF Yield

The Diamond Hill Investment Group (NASDAQ:DHIL) is an active asset manager, with a 20-year history, $26bn in AUM and a value investing philosophy. They had a mixed set of 4Q20 results, which despite a decline in revenues was however offset by higher investment income, leading to a net income attributable to common shareholders gain of +7.1% YoY. Our buy recommendation on the stock is predicated on its consistent fund performance, significant cash on the balance sheet, ability to generate robust free cash flows, attractive and inexpensive valuations. 2020 net cash to market cap [at current prices] stands at 41% and the company generated an estimated 2020 FCF yield of 11.9%.

DHIL Equity Fund PerformanceDHIL Equity Fund Performance [Source: 4Q 10Q]

We have updated our model following the full year 2020 results [see attached], and looking ahead, in 2021/2022 we expect Diamond Hill’s FCF yield to be at 9.3%/9.8%. Given this, a low P/E in 2021/2022 of 12.1x/11.2x, and 2020 expected dividend yield of 8.2%, we think the stock offers a favorable risk-reward scenario for investors. Importantly, ex-cash P/E [after deducting related interest income after tax], looks very attractive for the company and stands at 7.3x and 6.8x for 2021 and 2022 respectively.

DHIL Fixed Income PerformanceDHIL Fixed Income Performance [Source: 4Q 10Q]

$200.00 Target Price Implies 41% Potential Upside

Diamond Hill’s stock has performed well and is up 25% since our initiation in July 2020. We now value Diamond Hill at an ex-cash P/E of 12x, using our 2021 EPS estimate, and add it to current net cash per share [after deducting related interest income after tax] to arrive at a target price of $200.00. This represents a potential upside of 41% from current stock levels. At the $200.00 target price, implied P/E is 16.5x.


Income Statement ($ million)                                             FY 2018         FY 2019         FY 2020A        FY 2021E        FY 2022E        FY 2023E        FY 2024E

This article was written by

Value Investment Principals [VIP] has a 12-year track record, starting in 2009, focusing on unique under-covered stocks. Our typical ideas have zero/limited research coverage, “deep-value”, growth, high cash and FCF [Free Cash Flow]. We search for High Dividend Yields to appeal to retail clients, creating a steady source of income. We have a strong track record of performance for both large institutional and High Net-Worth Individuals [HNIs].Approximately 2/3 of our ideas have been in growth industries (with earnings growth of more than 2x the GDP growth rate). Our deep-value ideas all have multiple catalysts that are likely to unfold over the next 6-12 months to unlock value. We offer 10+ page research reports with detailed IS/BS/CF forecasts, rigorous ratio analysis and Discounted Cash Flow valuations alongside price targets on all recommendations. Our team consists of 3 highly skilled analysts with Masters degrees and extensive industry experience. Bottom-line, all of our ideas have been ignored by Wall Street analysts, and this creates opportunity in undervalued, under followed stocks with high dividend yields and growth.Sandy Mehta, CFA, our founder and Director, has over 30-years’ experience as a PM of a 5-Star award-winning small-cap fund as well as a flagship $15 billion Global Equity Fund. Sandy also founded Acumen Capital Management in 2004, and incubated a global long-short $200 million Hedge Fund. In 2015, he founded equity research firm Evaluate Research, his third entrepreneurial venture in global financial services, focusing on unfollowed equities. He has an MBA degree [Director’s List Honors] from the Wharton School, and a Master of International Management [with Honors] from the American Graduate School of International Management. He attained his CFA at the age of 25.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (10)

How can I make sure I get the special dividend? When should I buy shares? What date? Thank you.
Value Investment Principals profile picture
@mavsfan99 You should buy before 11/26/2021 in order to make sure you get the $19.00 special dividend.
I just bought 50 shares at $165. Hope it was a good time to buy in.
Asset managers like this are fairly simple to value. 2x revenue plus net cash. Just look at all acquisitions that follow that formula and even what they sold there own funds for. As such they should trade right around $150. As aum and revenue increase, so will the fair value. Hopefully they can see value come back in favor and also seed some funds with the cash to attract more aum at the right time. Good company at a very fair price that will return a good chunk of cash and hopefully catch some new aum. Keep the practice clean and simple and probably expect a boring 10-15% annualized return rate over next 10 years.
sjm- cfa profile picture
@Wolverine78 EV/R of 2X seems low to me, as EV went for over 3X and current valuations are higher with more traditional asset managers at ~2.8X and alternative asset managers at ~4.8X. Using some of the cash balances is a great point.
sjm- cfa profile picture
Appreciate the analysis. I like the stock and think it mis-priced although your valuation work is more optimistic than mine (my FV target currently $165). DHIL looks to be selling w/in mean/median valuation range of peers that I follow AB, BEN,BLK,FHI,VCTR & TROW w/DHIL having a superior balance sheet and profitability profile. Offsetting the superior financials is the fact that DHIL has limited liquidity and no stock coverage by the Street.

Its hard for me to see the end game for DHIL. Most small shops become part of larger organizations, either being acquired or buying other organizations to gain scale to leverage distribution, technology and/or compliance. There seems to be a strong appetite by others to purchase asset managers but the performance track records go up & down the elevators. Without a transaction, I am content to own a disciplined asset manager with great financials and their stock that is reasonably mis-priced.
@sjm- cfa Why are they carrying so much cash? SOP valuation incl large cash balance discounts are very hard to narrow and a high dividend or buybacks rarely do the job unless you are willing to hold 5+ yrs to realize the discount.
sjm- cfa profile picture
@parity don't have much of a perspective on the reasons for the large cash balances. Perhaps institutions that place money with DHIL are more comfortable with a company with a very strong balance sheet given the volatility we have seen the last 20 years? I agree a valuation discount can take a long time to narrow and amortize the valuation premium/discount over 3-5 years when looking at return potential of a stock.

I do take some comfort that DHIL, at its core, has a disciplined intrinsic value approach to investing and appears unlikely to get caught up in the fad-du-jour (such as GME) that could blow up a co. (or hedge fund). As DHIL's revenues & profits are tied to equity appreciation/depreciation, it is comforting to me as an investor, to have a balance sheet that can weather a pretty big storm. You may want something different.

Good luck investing.
@parity it’s not dead cash, I think you have some investing going on as well. It’s super valuable for when demand picks up to be able to seed a new fund. Maybe start 2-3 new funds and use own capital. This cost very little and then may attract new aum plus the money can grow at investment rates. Beauty of compounding And attracting aum that compounds which you get fees on. Just need to be patient for right time and right clients before you sees the funds. Lots of liquidity is name of game for them and huge value.
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