How To Profit From The ‘Tollbooth’ Of Housing
You don’t need to wield hammers and saws to benefit from powerful tailwinds in the housing sector. Most investors know that – and they usually turn to one of the publicly-traded homebuilders (or possibly a REIT) to profit.
But there’s actually another way.
Just about every home sale (new or existing) requires title insurance. No lender will sign a mortgage loan without it. If you’re a homeowner, you already know this.
Nobody wants to move into a new home only to find out a few months later that the person who sold it didn’t technically own the property. Title insurance companies help prevent that nightmare scenario and indemnify buyers and lenders (up to the value of the property or loan) in the event of a real estate dispute.
You know all those miscellaneous closing cost fees tacked on to the bottom of your mortgage loan? Well, this is one of them.
And as it turns out, there’s a way you can invest in this profitable, high-barrier business…
Fidelity National Financial (NYSE: FNF) is the No. 1 provider of title insurance and escrow services, accounting for a 33% share of the market. So if you’re a homeowner, there’s a one-in-three chance that you did business with FNF or one of its subsidiaries when you closed on your home and signed that stack of settlement documents.
Through brands such as Commonwealth and Alamo Title, FNF has built the No. 1 or No. 2 market share position in 39 states across the country. It’s the dominant leader in Texas, California, and New York, among others. That geographic diversity helps limit the impact of a downturn in any one region of the country.
Inside The Numbers
All told, the company raked in $8.3 billion in revenue over the past year. Its profit margins have led the industry for nineteen consecutive years. That margin is running 9.5% currently.
The lion’s share of earnings will be distributed to stockholders. Following a dividend hike last February and another in October, FNF is now shelling out quarterly payments of $0.33 per share, or $1.32 annually. That puts the yield of about 4% well north of the S&P 500 average of 2%. The payout ratio of 56% is modest and sustainable.
FNF is first and foremost an insurance company. That means damage claims must sometimes be paid. But given the extensive title search and examination process that precedes a policy, they are relatively uncommon (accounting for 3% to 4% of premiums). Most arise from unrecorded liens, incorrect property legal descriptions and hidden “defects” involving fraud and forgery.
The company maintains adequate loss reserves at all times to cover potential claims payments. Like other insurers, it also sees a lag (often several years) between the time premiums are collected and when a payment is disbursed. In between, the proceeds are invested in a diverse portfolio of interest-bearing bonds and dividend stocks that help supplement fees and underwriting profits.
And I think that portfolio is set to expand.
There are two main factors that contribute to growth in this industry. The first, obviously, involves the volume of mortgage originations and financings. Since title insurance fees are determined by the price of the underlying mortgage, rising property values also play a role.
FNF has the catbird seat, with 1,400 branch offices nationwide. The company also sells its products and services through a network of 5,200 independent commissioned agents. With the top market share in nearly four out of every five states, FNF will be a prime beneficiary of the long-overdue housing rebound.
Action To Take
Just about every time a home is built or changes hands, title insurance will be part of the transaction. FNF is also frequently called in for mortgage refinancings, which are quite popular given plunging interest rates. And it’s actively involved in commercial real estate as well as residential.
Despite the Covid-19 pandemic, homebuilders and realtors are seeing a surge in traffic in many parts of the country. And those customers aren’t just window shopping. Like a toll collector, FNF takes a small piece from every residential property sale.
That’s one of the reasons why I added the stock to our High-Yield Investing portfolio back on March 20. As it turns out, we timed this one perfectly. We bought when just about everything was being sold off amid the Covid-19 panic. And after the dust settled, FNF went on to rebound by nearly 50%.
But the stock still offers good value today. It’s trading at an earnings yield (net income/market cap) of 8%, which is below its five-year average. The stock is prone to profit-taking on a market pullback but has room to climb over the next year as housing recovers from the Covid-19 fallout.
P.S. If you’re hunting for income, then it pays to look beyond the usual suspects…
That’s what my subscribers and I do each month over at High-Yield Investing. In fact, many are earning thousands in extra income each month — enough to live a comfortable, worry-free retirement. If you’d like to learn more about my service, go here now.