In September, I was looking forward to seeing the decision of Investors Title Company (NASDAQ:ITIC) if it would once again declare a special dividend. While ITIC does pay a normal quarterly dividend, the dividend yield based on these 'normal' dividends is less than 1% so the special dividends are a nice touch to increase the total annual returns.
The third quarter was an excellent quarter for the company. As its underwriting activities are closely correlated with the activity on the US real estate market, it's not exactly surprising to see ITIC's results improving after a tough 2020.
The company saw its amount of net premiums written increase by about 25% to in excess of $72M and despite seeing a reduction in the fair value of its equity investments by $0.8M (compared to a $3.6M value increase in the third quarter of 2020), its total revenue increased by more than 20% to $81.4M.
Source: SEC filings
The operating expenses obviously also increased as the commissions paid to agents increased in line with the increased underwriting activities. All other operating expenses also increased in line with the revenue increase resulting in total operating expenses of just under $63M and a pre-tax income of $18.4M. While that's approximately 3% lower than in the third quarter of 2020, we need to keep in mind the fluctuations in the fair value of the securities had a massive impact. If we would add back the deductions in the fair value changes in Q3 2021 and deduct them from the Q3 2020 results, the pre-tax income would have increased to $19.2M compared to just $15.2M in the third quarter of last year. So while the net income and EPS of $7.63 in the third quarter of 2021 appear to be disappointing, keep in mind there are some mitigating circumstances.
Looking at the 9M 2021 results, the net income was $48.1M including a $7.3M income due to the changes in the fair value of the investments and a $4.6M contribution from 'other' elements (but this was also offset by a higher amount of 'other expenses'. So while the 9M 2021 EPS is $25.40, keep in mind the normalized result would have been a tad lower at approximately $41-42M for an EPS of just under $22.
In my original article, I was hoping the company would declare another special dividend, and this effectively happened. On November 8th, ITIC declared both the normal quarterly dividend of 46 cents per share, but also announced a special dividend to the tune of $18/share. I thought this was already widely anticipated as ITIC's share price ran up from just $185 two weeks earlier to $229 right before the announcement, but the share price continued to soar and reached a high of $248 before the stock started trading ex-div.
Not entirely unexpected, the share price fell back below the $200 level and even traded as low as $189.99 and that's understandable. ITIC is a stable and consistent performer and the declaration and payment of the special dividends are the only exciting things that happen per year. As such, I expect the share price to continue to drift sidewards in the foreseeable future.
This also means that ITIC likely is a good buy on any weakness. I am anticipating a normalized EPS of in excess of $25/share (the reported EPS adjusted for changes in the fair value of the investment portfolio) this year which means ITIC is still trading at a relatively low valuation. Perhaps the stock would be trading higher if ITIC would move to a higher quarterly dividend and a (much) lower annual special dividend but I also like the 'surprise' aspect of the traditional Q4 special dividend.
ITIC remains a buy on any weakness as the stock is trading at just about 8 times its earnings while the full-year dividend (including the special dividends) is now approximately 9%. I regret not having bought a position when I published my first article, but I hope to get a second chance.
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