Virtu Financial (VIRT 0.52%) is a stock that flies under the radar for many investors. But income investors in particular might want to take notice of its high dividend yield. The company pays out one of the higher yields in the sector at 4.7%.
Why is Virtu's yield so high, and is this a dividend stock to consider? Let's examine it.
A market maker that thrives on volatility
Virtu Financial is a high-frequency trader that generates most of its money from market-making services.
As a market maker, Virtu provides liquidity to markets and facilitates trading for its clients and brokers, generating revenue on the spread between the bid and ask price on a trade. It is one of the leaders in the industry, handling about 25% of orders placed by retail investors on U.S. markets.
With such a large market share, Virtu is a reliable revenue generator in any type of market, but it tends to thrive when markets are in turmoil, because there is more trading and the spreads between the bid and ask prices are typically wider in volatile markets. It is why the stock did so well in 2020 and 2021 -- up 64% and 19%, respectively, in those years.
Last year, trading slowed during the bear market, and as a result, at least through the first three quarters of the year, trading income was down compared to the previous year. Overall, revenue was down about 11% through the first nine months of 2022 to just under $1.9 billion.
But its market-leading position and ability to generate lots of cash flow make it a good dividend stock. It had about $1.1 billion in operating cash flow and about $7 billion in cash and cash equivalents, with an operating margin of 34.3% and a return on invested capital of 5.75%. These numbers point to a company that operates efficiently and generates lots of cash flow, even in a down market.
A solid, sustainable dividend
Virtu pays a quarterly dividend of $0.24 at a yield of 4.7%. That is a high yield, significantly beyond the sector average.
It is a little higher than it has been for most of the past five years, but that's because the stock price was down about 27% in 2022. Since the yield is the percentage of the share price the company distributes in dividends each year, yield will typically be higher when the stock price is lower.
So the other metric to monitor is the payout ratio to see if the company is handing out too much of its earnings to maintain its dividend. For most stocks, a payout ratio over, say, 60% might be considered excessive, indicating a business that could be putting too much toward the dividend at the expense of other things.
This is not a problem for Virtu, whose payout ratio remains a low 25%. Anything under 50% is considered acceptable, and the sweet spot is typically 25% to 35%, which indicates a company that can pretty comfortably sustain its dividend based on its earnings. Virtu's 25% ratio might even be considered low, meaning there is room to increase the dividend.
One reason the dividend is so manageable is that the company has maintained the same quarterly dividend, $0.24, since it went public in 2015. For the past seven years, it has neither raised nor reduced its dividend.
Investors can reasonably expect the company to maintain a solid payout, based on its earnings and cash flow.
Overall, I like the stock, both for its steady sustainable dividend and its long-term growth potential.
