The Fed signaled a half-percentage-point rate hike and rapid balance sheet reduction, reflecting the start of the most aggressive tightening cycle since 1994. More to come if inflation remains rogue. Mortgages are up, and prices are up. the The Fed goes nuclear, destroying wealth to fight inflation. Markets are down this year, and recession has become the base case scenario for many, including Deutsche Bank (comics). What are we doing, we small investors?
My advice is to make a plan and be disciplined. Invest, don’t speculate. Strong conviction will help you control your emotions in these turbulent markets. Like everyone else, my positions are in the red. My strategy is to accumulate stocks, averaging my investments gradually.
Second, buy industries that are likely to benefit from rising interest rates. These include names in insurance, banking and investment funds, whose business model fundamentally relies on interest rate spreads to earn profits. This is where the smart money is going now, including Blackstone (Bx), which acquired a 9.9% stake in AIG (AIG) Life & Retirement Business last July, and Berkshire Hathaway (BRK.A) (BRK.B), which bought Alleghany Corp (Y) last month, among others that have recently completed mega-deals in the insurance sector.
Today we shed some light on Fidelity National Finance, Inc. (NYSE: FNF), the largest title insurance company in the United States. It has excellent quantitative scores and multiple revenue streams, boosting its stable, investment-grade dividend yield by 4%.
Fidelity is the largest title insurance company in the United States, giving it excellent exposure to the booming US real estate market. Lenders require property buyers to have title insurance to protect against unexpected claims on the property, often used as security for the loan amount.
Despite rising interest rates, the US housing market remains strong. I think people put too much emphasis on interest, when in my opinion the decision to buy real estate is influenced more by the buyer’s ability to pay the monthly installments.
All economic indicators show that average wages in the United States are rising, at least partially offsetting rising house prices and inflation. Look at monthly housing data from the Federal Reserve Bank of St Louis. These monthly charts show data as recent as March, showing a resilient real estate market and suggesting that investors should expect strong quarterly results for FNF, an attractive proposition, especially given the ticker’s collapse.
It wouldn’t be safe to bet that the real estate market won’t cool down at some point. However, current data points to a lucrative first quarter, which I believe is a catalyst for a correction in equities. Historically, FNF has released first quarter results in late April or early May each year. Additionally, the company has weathered several recessions, including the 2007 mortgage crisis, by distributing dividends everywhere.
In 2020, FNF purchased F&G, adding a second line of business in addition to title insurance, a strategic move hailed by rating agencies for its diversification benefits. The F&G annuity business is not sensitive to the real estate market and allows FNF to take advantage of changing demographic trends by offering retirement solutions to retirees.
Title insurance makes up the majority of FNF’s revenue, exposing investors to the economic cyclicality of the real estate market, GDP, inflation and interest rates. In the past, sales fluctuated based on changing economic conditions, but also due to multiple mergers and acquisitions, spin-offs and spin-offs. Nonetheless, management managed to maintain strong finances, helping FNF achieve a credit rating upgrade in 2018.
I believe the risks of a recession are fully priced into the current price. The company’s $400 million dividend payout only represents a payout ratio of 19%. It has been paying dividends for at least 16 years and maintained its distribution during the 2009 mortgage crisis, a sign of a strong balance sheet and prudent financial management. Last year marked the 7th year of dividend growth. Share buybacks and dividend payouts were just $900 million in 2021, compared to $4 billion in operating cash flow. The low payout ratio leaves plenty of room to increase its yield, which amounts to 4%.
I don’t know if the company will start paying off the debt it incurred for the F&G acquisition. So far, he has not done so, preferring to keep the capital. Debt incurred for F&G costs between 2.25% and 3.5% per annum, with maturities up to 2031. The cost of funding has increased, along with the broader shift in the yield curve, investors taking into account the rise in interest rates. Nevertheless, FNF doesn’t have to worry about that now because most of its borrowings have long-term maturities. Below you will find the historical price of one of FNF’s debts (650 million, 3.4% 2030 bonds) and the maturity schedule of FNF’s global loan.
FNF benefits from excellent exposure to a booming real estate market. Contrary to what many believe, the US housing market is still strong, fueled by rising wages and falling unemployment, offsetting rising mortgage rates. Strong monthly data shows a resilient housing market in the face of rising mortgage rates, suggesting a strong Q1 this year, providing a catalyst for an upward stock market correction.
The insurance giant’s business model relies on its ability to generate investment income to fund insurance claims and annuity expenses. A significant portion of the FNF’s funds are in fixed-income securities, allowing the company to roll over its assets at higher rates as the Fed tightens monetary policy.
The company’s relatively safe 4% dividend reinforces the favorable trends listed above. A low payout ratio will allow the insurance giant to pursue its dividend growth strategy.