Fidelity National Financial Has It All: Growth, Dividend Growth, And Value
Summary
- Fidelity National Financial is firing on all cylinders, with robust growth and profitability.
- It should continue to benefit from low interest rates and increased digitization of its operations.
- Meanwhile, it maintains a strong balance sheet, raised its dividend twice this year, and is trading in value range.
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The tech and housing sectors have been big winners this year for different reasons. For the housing sector, accommodative Federal Reserve policies have pushed rates to historical lows, thereby driving home purchases and mortgage refinances across the country.
Fortunately for investors, there are a number of ways to play the housing market. This includes homebuilders and apartment REITs, many of which I see trading in fair or overvalued territory. This brings me to Fidelity National Financial (NYSE:FNF), which, on the other hand, appears to be lowly valued, especially considering its quality and economic reach. In this article, I highlight the characteristics that make FNF a Buy, so let’s get started.
Fidelity National Financial Has It All
Fidelity National Financial is a leading provider of title insurance and transactional services to the real estate and mortgage lending industries. It’s America’s largest title insurance company, operating under the names Fidelity National Title, Chicago Title, Commonwealth Land Title, Alamo Title, and National Title of New York.
FNF benefits from its reach and scale as the largest title insurance company. This has translated into strong operating leverage, as reflected by its 28% EBITDA margin, sitting comfortably ahead of the 23.5% sector median. In addition, FNF has proven its ability to generate robust growth. As seen below, it has earned an A- grade for Growth, with revenue growing by 55% YoY over the trailing 12 months, sitting well ahead of the 20% sector median.
(Source: Seeking Alpha)
FNF’s growth trend continued in the latest quarter, with revenue growing by 30% YoY during the third quarter, to $3.9 billion. This was driven by robust 9% growth in daily purchase orders closed compared to the same period last year. In addition, I’m also encouraged to see that commercial revenues continue to rebound, with 69% growth compared to the prior year period.
In addition, FNF’s acquisition of F&G, a leading annuities and life insurance provider, appears to be working out well, with total sales growing by 171%. At present, FNF has $32.7B in AUM, up from 7% sequentially from $30.4B in Q2.
Looking forward, I see continued robust results for FNF, as interest rates remain very low, with the yield on the 10-year Treasury note sitting at just 1.42% as of December 2nd. Plus, recent news that Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC) are going to start backing loans of nearly $1 million should continue to buoy the housing market.
Notably, robust growth in commercial transactions spilled into Q4, with orders growing by 15% in October compared to the same month last year. Plus, I see potential for margin growth, as management makes progress towards digital and automation, as noted by the CEO during the recent conference call:
Another critical aspect of our business has been our longer-term focus on integrating and leveraging automation, which has significantly improved our performance, as can be seen by our profitability this cycle. During the quarter, we reached a significant milestone as more than 2 million consumers have now been invited to begin their transactions on our digital inHere Experience Platform through Start inHere, and more than 1.3 million have chosen to do so.
Meanwhile, FNF maintains a strong BBB rated balance sheet, with a low debt-to-total capital ratio of 24.9%. This lends support to the 3.6% dividend yield, which comes with a low 24% payout ratio, 7 years of dividend growth, and a robust 19.5% 5-year dividend CAGR. Notably, FNF’s dividend was raised twice this year, and at $0.44 per quarter, sits 22% above where it was at the start of the year.
Of course, no investment is risk-free, and the following points should be considered:
- A slowdown in the housing market due to macroeconomic concerns could dent FNF’s residential title and commercial lines of business.
- Higher interest rates could drive lower refinancing activity.
- The F&G business introduces complexity risk, as it operates differently from FNF’s core title insurance business.
Turning to valuation, I find FNF to be attractively valued at the current price of $50.50 with a forward PE of just 6.7, sitting well below its normal PE of 13.5 over the past decade. While analysts expect an EPS decline of 21% next year, the forward PE would still be at a low 8.5 based on 2022 estimates, as seen below.
(Source: Seeking Alpha)
Sell side analysts have a consensus Buy rating on FNF with an average price target of $65, implying a potential 33% total return including dividends. Plus, Seeking Alpha’s Quant has a Very Bullish rating with A scores for Valuation, Growth, Profitability, and upward analyst revisions, as seen below.
(Source: Seeking Alpha)
Investor Takeaway
Fidelity National Financial is executing on all cylinders in this favorable environment. Looking forward, this should continue as interest rates remain low, and as Fannie Mae and Freddie Mac have recently upped the loan amounts that they support. Meanwhile, the F&G business adds another growth kicker and further digitization of FNF’s operations should boost margins. I view FNF as being a Buy at the current price for its growth, dividend growth, and value.
(Source: F.A.S.T. Graphs)
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This article was written by
I'm a U.S. based financial writer with an MBA in Finance. I have over 15 years of investment experience, and generally focus on stocks that are more defensive in nature, with a medium to long-term horizon. My goal is to share useful and insightful knowledge and analysis with readers. Contributing author for Hoya Capital Income Builder.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of FNF either through stock ownership, options, or other derivatives. 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.
This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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