Most of the market has recovered from the COVID-19 pandemic market selloff.
In fact, both the TSX and the S&P 500 are at all time highs right now. Despite the markets as a whole doing well, there are some good companies among Canadian stocks that are selling for lower valuations than they were before February 2020.
Onex Corporation (TSE:ONEX) is one of those good companies
Onex (TSX:ONEX) is one of Canada’s largest asset managers. Founded in 1984, Onex now manages over $44 billion in assets, and over its 37 years of investing, has averaged an internal rate of return (IRR) of 27% for its investors.
The company is mostly known for its private equity funds, but it also manages credit (debt) funds. Onex acquired Gluskin Sheff in 2019, which means Onex manages public equity and fixed income funds for clients as well.
Onex earns its money by charging investors a management fee for investing in its funds. Onex also gets performance fees when the funds perform well. In 2020 the company had fee revenue of $354 million, and increased its performance fees earned to $87 million.
The bigger portion of Onex’s value is the company’s investments. To align itself with its fund investors and have skin in the game, Onex invests in all of its funds. At the end of 2020, Onex owned over $8.6 billion of investments, which is equal to $93.73 per share.
Even though Onex has been a great investment manager over its history, and it has a valuable earnings stream from management fees, the stock is trading at less than book value. Onex stock is valued by the market at just 85% of the value of its invested capital and less than 80% of its book value, which includes $700 million of cash.
Although Onex Corporations dividend is small, it’s got tons of room to grow
Market Cap: $7.23 billion
Forward P/E: 157.73
Dividend Growth Streak: 8 years
Payout Ratio (Earnings): 3.97%
Payout Ratio (Free Cash Flows): Premium Members Only
Payout Ratio (Operating Cash Flows): Premium Members Only
1 Yr Div Growth Rate: 6.67%
5 Yr Div Growth Rate: Premium Members Only
Stocktrades Growth Score: Premium Members Only
Stocktrades Dividend Safety Score: Premium Members Only
The asset management fees gives Onex the earnings it needs to pay a small but growing dividend. The company has paid a dividend every year since 1987, and has grown its dividend every year for the last nine years, making Onex a Canadian Dividend Artistocrat. Since 2012, the dividend has increased by over 15% annually.
The stock’s yield is relatively low, at just 0.50%, but the dividend growth is likely to continue.
In 2020, Onex paid out $29 million of dividends, $0.40 per share. The asset management earnings alone, which exclude all the earnings from Onex’s invested capital, were $87 million, or $0.90 per share.
In total, the company had earnings per share of $7.64. That means the dividend represents a small percentage of earnings, a payout ratio of just 5.2%. Even if you only count the asset management earnings, which are less volatile, the payout ratio was just 44.4%.
Onex usually increases its dividend after the second dividend of the year, which will be paid in April. I expect we’ll get another dividend increase announced in May.
Onex Corporation also has a ton of room for share growth in 2021 and beyond
For most companies, investors can focus solely on the revenue and earnings growth of a company, but for Onex you are best to look at earnings growth from the asset management business and book value growth.
When Onex’s investments go up in value, the company gets to report that increase as earnings for that year. But investments don’t go up in value in a straight line, which means Onex’s reported earnings tend to jump around. For instance, as mentioned earnings per share was $7.64 in 2020, but the year before that, in 2019, earnings per share was $42.74! And the year before that, Onex actually reported a loss of $6.57 per share.
Over those three years, even though earnings were lumpy, Onex’s book value per share growth was steady, growing by 3.76% in 2018, 36.26% in 2019 and 8.04% in 2020. So it is important to keep an eye on book value per share growth instead of earnings per share growth.
At the same time, Onex now reports the earnings from its Asset and Wealth Management segment, which is the business of earning management fees.
The company has only reported the earnings for the segment for two years, but we can see that Asset and Wealth Management earnings grew 83.7% in 2020. These earnings should show much smoother growth than the company as a whole.
The company’s success investing its own money and the earnings growth from managing money for others is the reason a $10,000 investment in Onex 20 years ago is worth over $53,000 today, versus just $24,500 for the TSX.
Onex should be able to grow both its book value and its Asset and Wealth Management earnings at high rates going forward.
The company is still a skilled investor, so it’s easy to see that its book value is going to keep increasing. And the earnings from its Asset and Wealth Management division are going to keep growing. Onex raised its last big fund, Onex Partners V which raised assets of $7.15 billion, in 2018. Typically Onex raises a new fund every 2-3 years, and Onex Partners V is getting close to being fully invested, so Onex will be in the market raising a new fund in the near future.
As it raises funds and its assets under management increases, Onex’s fee earnings increases.
Until recently, Onex stock typically traded at a premium to its book value. Investors can safely look forward to Onex’s book value increasing annually, and as fee earnings increase, the market should reward Onex stock with a premium to book value again, compared to the 20+% discount now.
If you’re looking for some more reliable stocks, have a look at our Canadian recession proof stock piece we recently published.