My top pick this year for growth-oriented investors is Intercontinental Exchange (ICE). After a series of acquisitions, the firm is a leader in exchanges, fixed-income services, and mortgage solutions. Few other companies can compete in all three, says Prakash Kolli, editor of Dividend Power.
Even though the share price gained in 2023, it likely has more runway because the impact of high-interest rates has depressed mortgage demand. Intercontinental Exchange owns the New York Stock Exchange (NYSE), operates a derivatives exchange, owns electronic marketplaces for futures and energy contracts, and owns a soft commodity exchange.
It also offers pricing, market data, risk management, and trading support. It recently moved into mortgage technology by acquiring Ellie Mae in 2020 and Black Knight in 2023. All the platforms are growing and have excellent long-term outlooks.
Total revenue was around $7,292 million in calendar year 2022 and about $7,555 million in the last twelve months. We expect revenue and earnings to rise in 2023 as the company extracts efficiencies from its mortgage technology acquisitions.
Moreover, while demand is low, lower anticipated interest rates in 2024 may drive higher volumes. Although we do not expect more purchases in the near term because of high net debt and leverage, the exchanges and fixed-income segments should increase volumes organically.
The firm comes with some risk because acquisitions to build the mortgage business have caused debt and leverage to balloon. The leverage ratio is now 4.8X, and interest coverage is low at 5.2X. Also, rates are higher, causing interest expenses to rise. That said, the company did reduce debt after the Ellie Mae acquisition. As a result, we expect debt to decline over the next few years.
The corporation rewards shareholders through stock buybacks and growing dividends. It first paid a dividend in 2013 and increased it annually, attaining Dividend Contender status. The trailing growth rate has been in the double-digits, and the modest payout ratio of approximately 29% suggests more increases to come. However, the yield was still low at around 1.4% recently.
Intercontinental Exchange was recently trading at an earnings multiple of 21.7X, which seems high. But it is at the lower end of the 5-year and 10-year ranges. Hence, it is inexpensive on a relative basis. Investors are getting a well-run firm that will likely grow for years to come based on its existing portfolio of businesses.