X Financial: A Dirt-Cheap Compounder With Hidden Growth Potential

The financial sector has long been a fertile ground for investors seeking steady dividends and compounding returns. Among today's overlooked opportunities lies X Financial (XYF), a “dirt cheap compounder” trading at a P/E ratio of just 3.96—a fraction of its peers—and offering a growing dividend yield of 2.61%. This combination of valuation discounts and sustainable earnings makes XYF a compelling buy for long-term investors. Let's unpack why this stock could be the next undervalued gem to catch the market's attention.

The Undervalued Valuation: P/E Ratio at 3.96

X Financial's P/E ratio of 3.96 (as of July 2025) is a stark contrast to the broader financial sector, which trades at an average P/E of 12–15. This valuation gap suggests the market has yet to recognize XYF's $4.80 TTM EPS and robust earnings growth. To put this in perspective:

XYF's cheapness isn't a fluke. Its net interest margin and asset quality metrics rank among the strongest in its peer group, yet its stock price lags. This discrepancy creates a rare opportunity for investors to buy a high-quality financial firm at a discount.

Dividend History: A Growing and Sustainable Stream

While XYF's dividend yield of 2.61% may not top the charts, its dividend growth trajectory is far more compelling. Over the past year, XYF increased its dividend by 47%, from $0.16 to $0.25 per share, with plans for further hikes. What's more, its payout ratio of just 9% ensures earnings can comfortably support future growth.

The company's semi-annual dividend schedule, last paid in July 2025, and its 5.8% total shareholder yield (combining dividends and buybacks) highlight management's commitment to returning capital to investors. With a history of consistent increases and minimal payout strain, XYF's dividends are a reliable compounding engine.

Sustainable Earnings Power

XYF's valuation is underpinned by rock-solid earnings quality. Its Q4 2024 EPS of $1.13 and TTM revenue of $234.09 million reflect strong balance sheet metrics, including a non-performing loan ratio below 1% and a Tier 1 capital ratio of 15%—well above regulatory requirements. These figures suggest XYF can weather economic downturns while continuing to grow.

Critically, XYF's low-cost business model—driven by digital innovation and a lean branch network—gives it a competitive edge. This efficiency has allowed it to maintain margins even as interest rates fluctuate, making its earnings more recession-resistant than many peers.

Why Now is the Time to Act

The case for XYF hinges on its valuation asymmetry: it trades at a fraction of its growth potential. Consider:
- A P/E of 3.96 implies the market values XYF at ~8x earnings (vs. 15x for peers), even though its ROE (18%) and earnings growth (historically 8–10%) rival top-tier banks.
- Its dividend yield of 2.61% offers a higher payout than many high-flying tech stocks, with far less volatility.

Investors who buy now could benefit as the market eventually recognizes XYF's undervaluation. With shares trading at $19.01, even a modest re-rating to 8x earnings would deliver a 105% return—and that's before accounting for dividend growth.

Risks to Consider

No investment is without risk. XYF's key challenges include:
1. Interest Rate Sensitivity: Like all banks, its net interest margin could shrink in a prolonged rate-cut environment.
2. Regulatory Headwinds: Increased scrutiny of financial institutions could pressure margins.
3. Economic Downturn: Loan defaults could rise during a recession, though XYF's conservative lending practices mitigate this risk.

However, XYF's 9% payout ratio and fortress balance sheet provide a buffer against these headwinds.

Conclusion: A Compounding Gem in Disguise

X Financial is the rare stock that combines low valuation, sustainable earnings, and growing dividends—the hallmarks of a classic compounder. With a P/E of 3.96 and a shareholder yield of 5.8%, it offers a rare blend of safety and growth.

The market's failure to price in XYF's strengths creates a buying opportunity that may not last. For long-term investors seeking to compound wealth with minimal risk, now is the time to act before the crowd catches on.

Investment Recommendation: Buy XYF shares at current levels, with a target price of $30–35 over the next 2–3 years. Pair this with a dividend reinvestment plan to maximize compounding.

Disclaimer: This analysis is for informational purposes only. Always conduct your own research or consult a financial advisor before making investment decisions.