Patria Investments: An Interesting International Dividend Stock
Summary
- Patria is an asset management firm focused on South America that went public in 2021.
- It is a high margin, asset light business model with the potential to print massive amounts of money at scale.
- At 16x earnings, Patria is materially undervalued relative to the growth potential.
- The yield is currently 5.3% but has significant potential for future dividend increases.
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There has been a lot of talk about interest rates, volatile markets, and a recession in the first four months of 2022. We are also starting to see most of the speculative companies in ARKK sell off as investors have started to remember that fundamentals drive stock prices over the long run. I think we will see investors begin to focus on dividend stocks more and more in the coming months and years as markets look like they will continue to be volatile. Dividends are the simplest way to generate income without selling and I think income-oriented investments will have a better decade than broader markets. One of the international dividend stocks that recently made it onto my radar recently is Patria Investments (NASDAQ:PAX).
Investment Thesis
Patria Investments is an asset management firm focused on South America. The stock represents an asymmetric opportunity where the risk/reward is heavily skewed to the upside. The company is a high margin business that has the potential to print money at scale. The balance sheet is pristine, and AUM continues to grow at an impressive pace organically but also via acquisition. The valuation is very cheap compared to the growth potential of the company. The yield sits at 5.3% and is likely poised to grow in the coming years. Investors looking to capitalize on the development of South America might want to consider starting a position in Patria.
The Business
First off, I have to give credit where credit is due. I found out about Patria by reading High Yield Investor's recent article on the company. Patria hit the public markets in 2021, so it doesn’t have a long operating history as a public company. They do have a long history of growing AUM, which is going to be the biggest key to attractive returns for investors. The business has impressive margins and a rock-solid balance sheet with no long-term debt.
AUM (Patria)
In 2021, Patria acquired Moneda, which added $10B to AUM. They also announced a partnership with Kamaroopin and have plans to acquire the whole business in the next couple years. I think we will continue to see organic growth along with acquisitions as a complement. One of the other pieces that could help drive AUM growth is the scale of the clients. As you can see below, Patria has a client list that includes large pension and sovereign wealth funds around the world.
Patria Clients (Patria)
These are all pros, but the investor base is also a reason to be bullish. Blackstone (BX) still holds a significant stake in Patria and insider ownership is high. The partners also agreed to a 5-year lockup at the IPO, showing that they are bullish on the company and its prospects. This all comes at an attractive valuation.
Valuation
Patria’s valuation relative to its growth potential is the biggest driver of the bullish thesis. Shares currently trade at 16x earnings, which is cheap in my opinion. It is an asset light business with impressive margins and a long runway for growth. As long as the company executes on its plans for growth, buying shares under $20 is going to look real cheap in a couple years.
Price/Earnings (FAST Graphs)
I think there is also some potential for multiple expansion. Blackstone is a much larger company, and it trades at 20x earnings. It might be safer than Patria, but with a market cap of $127B, it has nowhere near the same growth potential. As long as shares stay under $20, investors can collect a juicy dividend while waiting for the upside.
The Dividend
It will be interesting to see what happens to the quarterly dividend in the next couple years. The yield is currently 5.3%, but it is hard to pinpoint exactly what the quarterly dividend will be. They plan to pay out 85% of distributable earnings, and my guess is that earnings will grow at a double-digit rate for the foreseeable future, leading to significant dividend growth. It will be a while before I start a position in Patria, but when I do, I plan to reinvest the dividends. The compounding effect for long term shareholders could be impressive. One other piece to note is that there is no dividend withholding tax, which is often an issue for investments outside of the US.
Conclusion
Are there risks to investing in a company focused on South America? Certainly. Crime, corruption, and less developed business practices all could have an impact on the company. However, the company has decades of experience that will likely help them navigate any potential challenges. Investors might prefer to invest in American companies, but I think the risk/reward for Patria is very skewed to the upside and the balance sheet is rock solid.
Investors focused on current income can collect a juicy 5.3% dividend that is likely to grow significantly in the coming years. The dividend will probably put a floor on the stock and the downside is limited in my opinion. I think we will also see capital appreciation to go along with the dividend growth. Investors buying under $20 can get paid to wait as Patria grows its AUM and its earnings. The long-term potential is significant and investors with a long term time horizon should consider starting a position in Patria.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.
I plan to buy shares of Patria in the next couple months.
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Comments (20)
Is there a reason for that?
But why did you write : "It will be a while before I start a position in Patria" ?
What are the reasons why you didn't open a position yet ?
