Compass Diversified Holdings: A High Dividend Yielding Stock

Introduction

Compass Diversified Holdings (NYSE:CODI) is an "acquirer, owner and manager of high cash flow, niche leading businesses operating in attractive industries." CODI's public structure provides investors with an opportunity to participate in the ownership and growth of companies that have historically been owned by private equity firms. Before we continue, it's important to note that CODI operates as an MLP (Master Limited Partnership) meaning any investor must be aware of the tax implications of owning equity (you'll have to deal with K-1 Reporting). Also, it's important to note that Compass Group Management is paid 2% of book value as a management fee -- with no mark-to-market increases in fee level as the value of businesses increase -- and also receives 20% of realized gains after a 7% hurdle. A diagram of the basic structure of CODI ownership is shown below:

Source

Analysts at independent rating agencies have contrasting opinions on the stock. The three analysts rating the stock at Zacks Investment Research all came up with different conclusions. One analyst rates it a "1-Strong Buy," another a "3-Hold," and the third rates it a "4-Sell," for an average score of "2-Buy" according to the firm. Keefe Bruyette & Woods maintain a "Market Perform" rating on the stock but has a price target set at $18.5 (13% higher than its current price). Finally, TheStreet has rated it a B (Buy). We agree with the general consensus of these rating agencies and recommend CODI to any dividend-focused investor who's comfortable with the company's MLP capital structure.

Value Breakdown

We take a quantitative approach to investing, preferring to focus our analysis on metrics that have strong predictive ability. Thus, we tend to analyze academic papers and perform historical back tests on different metrics before including them in our analysis. We will provide links to the academic papers we draw inspiration from as we progress through our breakdown of the stock, so investors can see for themselves what we base our conclusions on. We'll start by analyzing Compass' value profile. This is important to look at, as Nobel laureate Eugene Fama found that, "Value stocks have higher average returns than growth stocks."

1 2 3 4
View single page >> |

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in CODI over the next 72 hours. The author wrote this article themselves, and it expresses their ...

more
How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.