Is Fidelity National Financial More Than a Play on the Mortgage Refinancing Boom?

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Shares of Fidelity National Financial Inc. (FNF) have been on a tear, another beneficiary of the mortgage refinancing boom. Now the question looms large: after doubling in the last three years, can the company sustain the growth in earnings that has underpinned that impressive outperformance?

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The signals are mixed. The worry now is that the rate of growth in refinancing may be slowing, or, in the eyes of some analysts, be about to turn south. True, the Mortgage Bankers Association predicts that mortgage originations will climb by 16% this year, and Fidelity is one of a handful of companies that benefits whenever a property is sold or refinnaced, since it provides title insurance services.

The housing market trend remains upbeat, despite the recent announcement that existing home sales fell 1% in December, more than economists had anticipated. But that decline just erases a small part of November’s 4.8% gain, and isn’t causing many economists to lose sleep. What matters more to companies like Fidelity (not related to the mutual fund giant of the same name) is that most of its activity has been tied to refinancing, rather than linked to purchases of new and existing homes, which still lag historic averages. And there is a logical limit to the amount of refinancing that is left to be done: with mortgage rates now so low for so long, the number of those homeowners who have yet to refinance is growing smaller by the day. Moreover, there is no room for mortgage rates to fall much lower; the cost/benefit analysis of multiple re-financings just doesn’t compute.

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Clearly, with its PE to growth ratio having nosedived, Fidelity’s stock today seems undervalued. But its future prospects may well depend either on the volume of home sales climbing strongly and steadily over the course of the year, as well as on its ability to continue diversifying. In recent months, it has announced and completed several acquisitions, including Digital Insurance Inc. (which provides and administers health insurance and benefits management services to small and mid-sized companies) and J. Alexander Corp. (a restaurant chain), while it has increased its stake in Remy International, a maker of auto parts. (With impeccable timing, Fidelity sold its flood insurance business in late 2011, before Superstorm Sandy swept through the U.S. Northeast.)

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That varied stream of income – and the various one-time expenses or benefits tied to these transactions as the company forges ahead with its expansion and diversification plans – may make keeping an eye on Fidelity a little more complicated. But one trend is clear: despite the company’s recent announcement of an increase in its dividend payment, the company’s dividend yield has been declining, becoming less alluring in absolute terms in recent months as the stock price has rallied. It may not be time to walk away from this stock or from the trend, but the odds against further such rallies may be increasing. Investors should scrutinize the company’s upcoming fourth-quarter earnings announcement next month – but keep an even closer eye on the mortgage refinancing and origination trends to keep tabs on any changes.

Suzanne McGee, a contributing editor at YCharts, spent nearly 14 years as a reporter at the Wall Street Journal, in Toronto, New York and London. She is also a columnist for The Fiscal Times, and author of "Chasing Goldman Sachs", named one of the best non-fiction books of 2010 by the Washington Post. She can be reached at editor@ycharts.com.


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