Category: Dividend Stocks

Companies return profits to shareholders through two main channels, capital gains and income. A high dividend yield indicates that a company is returning a large amount of cash to shareholders relative to the value of the company. This allows investors to maximize their income received relative to their investment amount. The gross dividend is calculated from the net dividend amount paid to shareholders plus the value of any attached franking credits associated with those dividends. A fully franked dividend will have franking credits equal to 30% of the gross dividend value, which can, therefore, represent a significant source of additional value.

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Dividend Stocks

Australian Household Debt Levels Are a Risk, But Westpac Is Not as Risky as Share Price Implies

Business Strategy & Outlook:   

Westpac Bank is the second-largest of Australia’s four major banks. The bank provides a range of banking and financial services to retail and business customers, including mortgages, consumer finance, credit cards, business loans, and term deposits. Following the divestment of its financial planning and advice business, even its wealth arm–BT Financial Group–is likely to go. Under new leadership, most non banking units are being divested, including general, life, and mortgage insurance. Westpac’s strategy is anchored in its commitment to conservatively manage risk across all business areas, following its near-death experience in the early 1990s. The multi-brand, customer-focused strategy aims to capture an increasing share of business from its Australian and New Zealand banking and wealth management customer base. 

Westpac established itself as an integrated financial services group in the early 2000s with its expansion into wealth management, acquiring Rothschild, BT Financial Services, and Hastings. The company diversified domestically by acquiring St. George Bank in 2008, providing access to a broader customer base and adding scale. Westpac has a 22% share of home lending. While risks directly related to coronavirus have abated, wage pressures, labor, and supply chain challenges, and high inflation pose challenges as the cash rate increases. The main current influences on earnings growth are modest credit growth and widening margins as the banks reprice lending rates in a rising cash-rate environment. Operating expenses should continue to fall as the bank resets its cost base after completing a number of remediation and technology projects. The bank has suffered from slow approval times in home lending, but expects increased resources and digital investments to improve service levels. After enjoying super-low impairment charges pre-2020, large loan losses expected due to COVID-19 resulted in large provisions in fiscal 2020.The expected return to midcycle levels around 0.18% in fiscal 2025.

Financial Strengths:  

Westpac comfortably meets APRA’s common equity Tier 1 ratio benchmark of 10.5%. The bank’s common equity Tier 1 ratio was 11.3% as at March. 31, 2022, with the bank’s target range of 11% to 11.5%. This is based on APRA’s globally conservative methodology and a top-quartile internationally comparable 17.4%. The risk of higher loan losses is viewed and credit stress inflating risk-weighted assets as the greatest threat to the bank’s capital position in the near term. In the past three years, the proportion of customer deposits to total funding is about 60% to 65%, reducing exposure to volatile funding markets. After completing an AUD 3.5 billion share buyback in February 2022 Westpac has AUD 3.8 billion in excess capital as at March 31, 2022.

Bulls Say: 

  • Improving economic conditions underpin profit growth from fiscal 2021. Productivity improvements are likely from fiscal 2023.
  • Cost and capital advantages over regional banks and neo-banks provide a strong platform to drive credit growth.
  • Consumer banking provides earnings diversity to complement the more volatile returns generated from business and wholesale banking activities.

Company Description: 

Westpac is Australia’s oldest bank and financial services group, with a significant franchise in Australia and New Zealand in the consumer, small business, corporate, and institutional sectors, in addition to its major presence in wealth management. Westpac is among a handful of banks around the globe currently retaining very high credit ratings. The bank benefits from a large national branch network and significant market share, particularly in home loans and retail deposits.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

Fastenal Reports Solid Sales and Margin Growth in its Second Quarter 2022 Results

Business Strategy & Outlook:   

Since opening its first fasteners store in 1967, Fastenal has built one of the largest industrial distribution businesses in the United States. For many years, Fastenal’s growth story was driven by its branch count, which now stands just under 1,800. While this expansive footprint is still an important component of Fastenal’s business model, other strategies–including expanding its product portfolio, its vending and inventory management services, and, most recently, its on-site program–have become increasingly important growth drivers. The benefits of Fastenal’s vending, inventory management, and on-site services are twofold: Not only do these services drive incremental revenue, they also embed Fastenal in its customers’ procurement processes, which supports higher retention rates and pricing power. Company believes Fastenal has a first-mover advantage in both vending and on-site services, introducing the former in 2008 and the latter in 1992 (although the on-site strategy did not become a focused strategy until the past few years), and sees long growth runways for both offerings. In addition to growth through its vending and on-site initiatives, Fastenal is well positioned to benefit from customer consolidation trends. In recent years, customers have been consolidating their maintenance, repair, and operations, or MRO, spending with large distributors to leverage their purchasing power and increase operational efficiency. With its national scale, broad product portfolio, and inventory management services, the company believes Fastenal can capitalize on this trend and take market share from smaller and less capable distributors. 

Because Fastenal’s sales mix is increasingly skewing more toward large national accounts, on-site programs, and more price-competitive MRO products, the company’s gross margins are likely to come under pressure. However, the combination of higher sales volume and containment of selling, general, and administrative costs provide Fastenal the opportunity to realize strong operating leverage and expand operating margins. It is forecasted that Fastenal’s operating margin will reach 21% by midcycle year.

Financial Strengths:  

Fastenal has an outstanding debt balance of approximately $390 million. It is leveraged at only 0.1 times 2021 EBITDA, which is very conservative relative to the other industrial distributors company covers. Fastenal’s earnings provide substantial headroom to service debt obligations. During fiscal 2021, Fastenal incurred only about $10 million of interest expense and generated about $1.4 billion of EBITDA, which equates to an extremely comfortable interest coverage ratio. Even with its expansive store footprint and cyclical end markets, Fastenal has a proven ability to generate free cash flow (defined as operating cash flow with fewer capital expenditures) throughout the cycle. Indeed, it has generated positive free cash flow every year since 2003. Given its conservative balance sheet and consistent free cash flow generation, the company believes Fastenal’s financial health is satisfactory.

Bulls Say: 

  • Vending and on-site programs should provide a long growth runway for Fastenal.
  • Fastenal can capitalize on its national scale, broad product portfolio, and inventory-management services to take market share from smaller and less capable distributors.
  • Despite serving cyclical end markets, Fastenal’s business model generates strong free cash flow throughout the cycle. Fastenal is likely to continue to use its cash flow to fund a shareholder-friendly capital allocation strategy.

Company Description:  

Fastenal opened its first fastener store in 1967 in Winona, Minnesota. Since then, Fastenal has greatly expanded its footprint as well as its products and services. Today, Fastenal serves its 400,000 active customers through approximately 1,760 branches, over 1,400 on-site locations, and 14 distribution centers. Since 1993, the company has added other product categories, but fasteners remain its largest category at about 30%-35% of sales. Fastenal also offers customers supply-chain solutions, such as vending and vendor-managed inventory. 

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

Fortune Brands has historically generated consistent free cash flow

Business Strategy & Outlook

Since spinning off from its holding company Fortune Brands, Inc., in 2011, Fortune Brands Homes and Security has achieved admirable top-line growth and improved profitability. Its improved financial performance has been the result of a successful operating strategy overlaying a backdrop of strengthening new-home construction and repair and remodel, or R&R, spending. Residential construction was a bright spot during pandemic-affected 2020-21, and housing starts should remain elevated at about 1.6 million units in 2022. However, deteriorating affordability has slowed housing demand, and the project starts to decrease 10% in 2023 to 1.435 million units and decline roughly 10% in 2024 to 1.3 million units, which is about in line with new home production in 2018-19. One can expect affordability will improve over the next two years as mortgage rates subside and home price appreciation returns to its 4% long-term trendline. The project will rebound to 1.55 million units by 2026 and average around 1.45 million units toward the end of the decade.

R&R spending surged during the pandemic, but one cannot expect a dramatic downturn in home improvement projects, although the amount spent per project could moderate over the near term, resulting in flattening growth over the next couple years. Historically, project incidence has been relatively stable, but average project expenditure is more sensitive to macroeconomic conditions. Nevertheless, continue to see a 4%-5% long-term growth trajectory for R&R spending bolstered by several secular tailwinds related to aging housing stock, favorable demographics, and increased acceptance of smart home and energy-efficient products and solutions. Fortune Brands has historically generated consistent free cash flow. Since stand-alone cash flow data has been available, the company has posted 16 straight years of positive free cash flow, and that trend continues, supporting future acquisitions and shareholder distributions.

Financial Strengths

The Fortune Brands has a sound balance sheet, and its consistent free cash flow generation should easily support its debt-service requirements and future capital-allocation decisions. As of first-quarter 2022, Fortune Brands had approximately $3.4 billion of outstanding debt and $378 million of cash, which equates to a net debt/2022 estimated EBITDA ratio of about 2.1. Fortune Brands’ debt balance consists of outstanding debt on its $1.25 billion revolving credit facilities, $600 million of 4% five-year senior notes due in September 2023, $500 million of 4% 10-year senior notes due in June 2025, $700 million of 3.25% 10-year senior notes due in September 2029, $450 million of 4.00% 10-year senior notes due in March 2032, and $450 million of 4.50% 30-year senior notes due in March 2052. Fiscal 2006 is the first-year stand-alone cash flow statement data available for Fortune Brands Home & Security, and 2021 marked the 16th consecutive year the company has generated positive free cash flow. Since 2006, the company has posted an average free cash flow conversion rate of over 100% and a 7% average free cash flow/sales ratio. The company’s ability to generate consistent free cash flow, even in a downturn, demonstrates the durability of Fortune Brands’ business model.

Bulls Say

  • The R&R market is poised for long-term growth, driven by several secular tailwinds, including the aging housing stock and favorable demographics. 
  • Fortune Brands has a robust acquisition pipeline, and future acquisitions could help the company achieve stronger sales growth. 
  • Fortune Brands’ consolidated profitability and ROIC will improve after it spins off its less competitively advantaged cabinets business.

Company Description

Fortune Brands Home & Security is a leading home and security products company that operates three segments. The company’s $2.9 billion (fiscal 2021) cabinets segment, which will be spun off in early 2023, sells cabinets and vanities under the MasterBrand family of brands. The $2.8 billion plumbing segment, led by the Moen brand, sells faucets, showers, and other plumbing fixtures. The $2.0 billion outdoors and security segment sell entry doors under the Therma-Tru brand name, Fiberon-branded patio decking, and locks and other security devices under the Master Lock and SentrySafe brand names.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

Tesco Is the Best- Positioned Grocer in the Coverage

Business Strategy & Outlook:
Tesco, the largest grocery retailer in the United Kingdom in terms of sales and store network, has successfully completed an ambitious turnaround. It has seen one of the worst times in its history over the past decade, including an accounting controversy in 2014 and a subsequent decline in profits and growth owing to the advent of discounters in the U.K. food retail business. The firm is largely focused on enhancing the in-store experience, providing new own-brand products (entry-level and fresh produce), and re-evaluating supplier connections (smaller base and longer-term partnerships). The turnaround strategy focused on the company’s core strengths: food size and well-documented purchasing power.

Tesco’s ability to better control supplier-related cost inflation, along with its superior cost-saving measures, has enabled it to not only balance competition challenges, but also boost margins and price position (via the Aldi Price Match plan) relative to its competitors. The concerted efforts of management to convert these scale advantages into profitable expansion were fruitful. In the future, the group shall generate more normalized levels of profitability, albeit below historical standards. Tesco outperforms most of its Big Four competitors (Sainsbury’s, Asda, and Morrisons) on key indicators like grocery volume, like-for-like sales growth, and large-store sales growth, proving that its approach is succeeding. Tesco’s Booker is the major food distributor in the U.K., with a presence in both the retail (Symbol and Independent) and catering industries. This is consistent with the company’s long-term strategy to increase scale by consolidating its supplier base and indirectly increase food sales through Booker’s overlap in the food sector.

Financial Strengths:
Tesco is in solid financial condition. At the end of fiscal 2022, net debt/adjusted EBITDA (including operating leases) was 3 times. The operating lease liability is around GBP 7.5 billion, and the net pension shortfall is negligible. The dividend was reintroduced in fiscal 2018 (expected around GBX 11 per share for fiscal 2023) after being suspended when earnings dropped in 2015. Management has also implemented stricter financial discipline, enhanced working capital, and ceased the battle for space. Dividends might expand in parallel with underlying EPS growth at a payout ratio of 50% over the next five years (from slightly less than GBX 10 per share to about GBX 14 by 2027). Given the sector’s low growth prospects and Tesco’s established presence, the grocer to is able to finance its development and store maintenance with capital expenditures below 2.0% of sales. Tesco generates free cash flow at a rate that is significantly higher than the industry average, as a result of the recent improvement in profitability. Free cash flow to the firm is expected to account for close to 3% of sales on average through fiscal 2027. In recent years, Tesco has repositioned its operations, including withdrawing from less lucrative areas, which has helped reduce its debt. It also owns property, worth about GBP 22 billion at the end of fiscal 2022, which could be shed to generate cash if needed, though it has been doing the opposite recently by acquiring more stores to rid itself of inflation.

Bulls Say:
As the largest grocer in the U.K. in both the online and offline channels with almost 100% coverage and a network of more than 3,500 stores, Tesco should be able to use its scale to drive results in ways subscale peers cannot.
An early mover in the online channel, Tesco not only holds a dominant market position (35% online grocery share) but also operates profitably on an EBIT level, thanks to scale.
Management is successfully repositioning the business in terms of pricing, in-store experience, and operating efficiencies.

Company Description:
Tesco is one of the largest food retailers in the world, operating thousands of stores in the United Kingdom, Ireland, and Europe. It recently sold its Asia operation. According to Kantar, Tesco is the market leader in the U.K. with a share around 27%, roughly double that of Asda and Sainsbury’s. Tesco operates a core supermarket business in addition to convenience and neighborhood outlets. With a 35% digital market share in the U.K., the company holds a dominant position online. Tesco gained exposure to the cash-and-carry and out-of-home delivering industries with the landmark GBP 4 billion acquisition of Booker in 2018.

(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Dividend Stocks

Victrex is a Global Leader in High-Performance Plastics

Business Strategy & Outlook:    

U.K.-based Victrex is the creator of and dominant market leader in polyetheretherketone, or PEEK, a lightweight ultra-high-performance plastic that suits the most demanding applications in transportation, oil and gas, and electronics. It serves these industrial markets through its industrials segment, which accounts for around 80% of sales. The company has broadened applications of PEEK to healthcare, notably implantable spinal fusion cages. Healthcare sales are housed in the medical segment, which contributes the other 20% of sales, but has higher margins than the industrial business. Total market demand for PEEK is small, currently around 6,000 metric tons per year. Victrex has succeeded in its efforts to expand the market for PEEK, as evidenced by mid-single-digit volume growth at the company over the past decade. The market for PEEK has plenty of room to grow by capturing increasing demand for metal-replacement products. Indeed, Victrex believes annual demand for PEEK could ultimately grow to 80,000 metric tons, a reasonable view given that the market size for many specialty polymers is 2-3 times larger. 

While PEEK has been off-patent for many years, competition has been benign with only a handful of suppliers entering the market. Competitive dynamics are evolving slowly. Solvay made a significant capacity expansion a few years ago, but this is the only company that has made real inroads into the market. There is room for both Victrex and Solvay to be major players without serious price competition. The company’s strategy is shifting to prioritize moving downstream into semi finished and finished products and specialty applications, in order to capture a larger portion of profits in the value chain. Currently, these products account for about 30% of sales. Victrex’s pipeline of downstream products under development could easily double current sales, but a material impact on group profit is probably several years away.

Financial Strengths: 

Victrex is in excellent financial health. The balance sheet is managed very conservatively–possibly too conservatively—with no debt and significant working capital. However, this is a strategic decision to ensure customers have strong faith in the security of PEEK supply, because Victrex has historically been the only major producer. At fiscal end-2021, Victrex had a GBP 96 million net cash position. In addition, the pension deficit is modest. Liquidity is enhanced by a GBP 40 million committed bank facility, which was unused at fiscal end-2021.

Bulls Say: 

  • Victrex is making progress moving downstream in the PEEK value chain, which should help protect margins as the upstream business becomes more competitive.
  • The company has several GBP 50 million sales opportunities in its medical development pipeline, which should invigorate segment growth in the long term.
  • Given the company’s significant free cash flow and shareholder-friendly capital-allocation policies, investors have the potential to realize extra returns through special dividends.

Company Description:  

Victrex is a British specialty chemicals company whose business is based predominantly on manufacturing and creating solutions using polyetheretherketone, or PEEK, an ultra-high-performance lightweight plastic. Around 40% of sales are generated in Europe, with Asia and the Americas contributing 30% each. The business has two segments. The industrial segment targets transportation, energy, electronics, and manufacturing, while the medical segment provides healthcare solutions for the implantable device markets.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Fair market value laws in several states support Essential’s water business acquisition strategy.

Business Strategy & Outlook

For more than 50 years, Essential Utilities–formerly Aqua America–was one of the few pure-play water utilities in the United States. But its $4.3 billion acquisition of Peoples Gas in March 2020 made the company nearly 50% larger and diversified its earnings mix. The gas business contributes about one third of earnings on a normalized basis. Essential’s gas and water utility earnings are mostly rate regulated. The management prioritizes infrastructure investments and paying a robust dividend, like most other utilities. The Essential’s earnings to grow 8% annually during the next five years due to its water system acquisition opportunities. This is among the highest growth rates in the U.S. utilities sector. Although efficiency savings have reduced retail water use for several decades, Essential has been able to grow earnings and the dividend by replacing and upgrading infrastructure that is decades old. The Essential to grow by acquiring small, typically municipal-owned water systems. In the U.S., 85% of the population is served by a municipal water utility, offering a long runway of acquisition growth opportunities.

Similarly, they expect little natural gas usage growth at Peoples Gas, which had been owned by a private equity group. But the gas business still should produce steady earnings growth as Essential replaces and upgrades the system infrastructure. Fair market value laws in several states support Essential’s water business acquisition strategy. These laws require Essential to pay municipalities at least the assessed value of the system it acquires and allow Essential to add these assets to rate base at the assessed value rather than historical cost. The municipalities benefit by ensuring they get fair prices, and Essential shareholders benefit by ensuring the company doesn’t overpay for growth. In many cases, these deals are immediately value-accretive. Recent FMV legislation in Kentucky and West Virginia opens acquisition opportunities near areas Essential already serves.

Financial Strengths

Essential maintains a capital structure in line with its regulatory allowed capital structure for ratemaking purposes and leverage metrics in line with high investment-grade credit ratings. One cannot expect that to change. The Essential to issue new debt to fund growth investments and acquisitions in the coming years. One cannot expect any material new equity needs after the company raised $300 million in 2021. With constructive regulation, The Essential will be able to use its cash flow to fund most of its equity investment needs during the next five years. Essential has paid an annual dividend since 1945 and increased it at least 5% for each of the last 25 years. The Essential will be able to continue growing the dividend at this rate or higher for the foreseeable future while staying below management’s 65% maximum payout ratio threshold.

Bulls Say

  • Constructive regulation allows Essential to raise rates through surcharges or rate cases to reduce regulatory lag and enhance cash flow available to pay the dividend and invest in growth projects. 
  • Fair market valuation state laws allow Essential to make municipal water utility acquisitions immediately value-accretive for shareholders. 
  • Essential has raised its dividend 31 times in the last 30 years, including 29 consecutive increases of more than 5%.

Company Description

Essential Utilities is a Pennsylvania-based holding company for U.S. water, wastewater, and natural gas distribution utilities. The company’s water business serves 3 million people in eight states. Nearly three fourths of its water earnings come from Pennsylvania, primarily suburban Philadelphia. It also has a small market-based water business that provides water and water services to third parties, notably natural gas producers. Its $4.3 billion Peoples Gas acquisition that closed in March 2020 adds 750,000 gas distribution customers in Pennsylvania, West Virginia, and Kentucky.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Wide-Moat Masco Is Mostly Exposed to the Less-Cyclical Repair and Remold Market

Business Strategy & Outlook:   

Company thinks Masco’s financial performance over the past eight years has been as much of a self-help story as a story of improving end markets. Masco almost entirely refreshed its senior executive management team in 2014. Since then, it has taken significant measures to build a stronger and more consistent business model. The firm divested its most cyclical and least profitable businesses (it spun off its installation business, now named TopBuild, to shareholders in 2015 and sold its windows and cabinetry businesses in 2019 and 2020, respectively). Management also executed significant cost-reduction initiatives and shored up the firm’s balance sheet. According to the company, Masco’s sale of its windows and cabinetry businesses was a positive development for the firm because it had long viewed its plumbing and decorative architectural businesses as the firm’s crown jewels and key drivers of the company’s valuation, while Masco’s cabinetry and windows businesses were often laggards that had been a drag on margins and returns on invested capital. 

Repair and remodel, or R&R, spending, and to a much lesser extent, new residential construction, are major drivers of Masco’s financial performance. After divesting its installation, windows, and cabinetry businesses, the firm’s overall exposure to the R&R market is 88% of sales. R&R spending surged during the pandemic, but the company doesn’t expect a dramatic downturn in home improvement projects, although the amount spent per project could moderate over the near term resulting in flattening growth over the next couple years. Historically, project incidence has been relatively stable, but average project expenditure is more sensitive to macroeconomic conditions. Nevertheless, it will continue to see a 4%-5% long-term growth trajectory for R&R spending. The company expects the repair and remodel market will benefit from several long-term secular tailwinds related to aging housing stock, favorable demographics, and increased acceptance of smart home and energy-efficient products and solutions.

Financial Strengths:  

Company thinks Masco has a sound capital structure, and its consistent free cash flow generation should easily support its debt-service requirements and future capital-allocation decisions. Masco’s balance sheet has improved significantly over the past five years; based on calculations, net debt/EBITDA peaked at over 4 in 2011 but is now 1.7. Masco plans to maintain a similar leverage ratio to support an investment-grade debt rating. Masco has approximately $3 billion of outstanding debt with maturities staggered through 2051, but the next maturity isn’t until 2028 when $600 million is due. Masco has ample liquidity, with roughly $500 million of cash on hand and over $700 million available on its credit facility. By calculations, 2021 marked the 31st consecutive year Masco has generated positive free cash flow since financials were publicly available via the Securities and Exchange Commission website (1991). This ability to generate consistent free cash flow, even in a downturn, demonstrates the durability of Masco’s business model.

Bulls Say: 

  • The R&R market is poised for long-term growth, driven by several secular tailwinds, including the aging housing stock and favorable demographics. 
  • Masco has attainable growth plans for its plumbing and decorative architectural segments. These strategies could drive meaningful above-market growth over the next several years. 
  • Masco’s brand portfolio enjoys pricing power, which supports margin stability.

Company Description:  

Masco manufactures a variety of home improvement and building products. The company’s $5.1 billion plumbing segment, led by the Delta and Hansgrohe brands, sells faucets, showerheads, and other related plumbing fixtures and components. The $3.2 billion decorative architectural segment primarily sells paints and other coatings under the Behr and Kilz brands, but it also sells builder hardware and lighting products. 

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Initiating on Glanbia With No-Moat Rating, EUR 12 Fair Value Estimate; Share Slightly Undervalued

Business Strategy & Outlook:   

Despite its positioning in fast-growing segments, benefiting from secular trends around healthy lifestyle and wellness, the company believes Glanbia’s products are largely commoditized and it assigns the company a no-moat rating. From its humble beginnings as an Irish dairy cooperative, Glanbia has transformed over the past few decades into a global manufacturer of ingredients and sports nutrition, primarily by using whey, a byproduct of milk processing and cheese manufacturing. Acquisitions have served to further diversify the portfolio away from whey-based ingredients and products, with Glanbia also building a sizable position in vitamins and mineral premix, which has contributed to the accelerated growth of the segment. Its cheese operations, however, either wholly owned or as joint ventures, still account for a large share of revenue and it is believed to have constituted a distraction for management from the higher-value-added parts of the portfolio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            The performance nutrition segment, which includes brands such as Optimum Nutrition, BSN, and SlimFast, has been struggling over the past five years, with diminishing pricing power and organic growth rates that have significantly lagged the market, translating into share loss to new and nimble players. Company believes the acquisition in late 2018 of the SlimFast brand has done little to rejuvenate the portfolio and improve its growth prospects, and it surmises that the brand’s deteriorating equity has added more pressure to already increasing customer acquisition costs. Company believes the nutritional solutions segment to be the most valuable for Glanbia, delivering above-average growth rates and margin. The company’s leading portfolio of protein and vitamin and mineral premix ingredients and solutions creates a compelling proposition for customers in the food, beverage, and supplements space. Although the management don’t believe the products to be differentiated—Glanbia’s research and development spend of below 1% is among the lowest in the ingredients peer group— do reckon that Glanbia’s credentials in the space are likely to continue to lead to outperformance for the segment versus the market over the midterm                                                                                                                                                                                                                                                                                                                                                                     

Financial Strengths:  

Glanbia is in good financial health. Net debt levels are manageable, with a net debt/adjusted 2021 EBITDA ratio of 1.8 times, in line with previous years, and available banking facilities totaling EUR 1.2 billion. Company forecasts acquisition spending of around EUR 100 million per year for the next five years, in line with historical averages and keeping with the company’s strategy of expanding its footprint in the ingredients market. The company expects these acquisitions to be largely financed from free cash flow generation, which will enable Glanbia to maintain its solid financial position. In the five years leading up to 2021, capital spending averaged only 2% of sales, making Glanbia one of the most capital-light companies in the ingredients industry. The company employs a progressive dividend policy, targeting a dividend payout ratio of 25%-35% of adjusted earnings per share, which are viewed as manageable.

Bulls Say: 

  • In the nutritional solutions segment, Glanbia is well positioned to benefit from growing consumer trends regarding healthier lifestyles, wellbeing, and increased immunity. 
  • The sale of its 40% holding in the Glanbia Ireland joint venture further enables Glanbia to focus and reinvest in its higher-value-added segments. 
  • Glanbia’s portfolio expansion into vitamin and mineral premix has enabled the company to create a compelling proposition for supplement and on-the-go snacking manufacturers, and expects these applications to continue to drive the above-average growth of the segment.

Company Description:  

Meaning “pure food” in Irish, Glanbia is a global ingredient and branded performance nutrition manufacturer present in 32 countries with sales in 130 countries and over 7,500 employees. Originating in Ireland in the 1960s in the dairy processing industry, predecessor companies were initially listed in 1988 before Glanbia came into being in 1999. Production facilities are concentrated in Ireland, the U.K., Germany, the U.S., and China. Glanbia processes over 6 billion liters of milk annually and is also a major producer of U.S. cheddar cheese. Glanbia generates more than 80% of its revenue in the U.S.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Goldman Sachs is significantly leveraged to rising interest rates

Business Strategy & Outlook

Goldman Sachs has made progress on the strategic plan that it laid out at the beginning of 2020 and set even more ambitious goals in 2022. The company is now targeting a medium-term return on tangible equity of 15% to 17% compared with a previous goal of over 14%. In addition to the ROTE target, management also set an expense ratio goal of about 60% and growth targets for its asset management and consumer banking businesses. While one cannot be sure the company will hit all of those goals over the next three years, the company will exceed a 15% ROTE in the long run after its consumer business has reached a more profitable scale. Goldman Sachs’ trading business also remains a large swing factor, as it requires more capital and tends to have lower operating margins than the other business segments. COVID-19 boosted revenue in 2020 and 2021 with high trading caused by economic uncertainty and companies issuing debt and equity to initially bolster capital and then later issuing debt and equity to take advantage of low interest rates and a strong stock market. Net revenue should retrace somewhat in 2022 and 2023 from the unusually strong 2021 level, and as per forecast 2023 revenue to be about $45 to $50 billion compared with nearly $60 billion in 2021.

As per given forecast, the firm should trade at 1.5 to 1.6 times tangible book value. Its investment management business has become a priority. Assets under supervision exceeded $2.4 trillion at the end of 2021, while related investment management fees have been around 15%-20% of net revenue compared with 11%-12% before 2008. Investment management is a relatively stable, high-return-on-capital business that is well suited to the current regulatory environment. Goldman has also built out a large virtual bank and had deposits of $350 billion at the end of 2021 compared with $39 billion in 2009. The deposit base and related net interest income will add more stability to the company’s revenue stream and balance sheet in the medium term. Goldman Sachs is significantly leveraged to rising interest rates, so its valuation shouldn’t be as affected as peers by the current uncertainty over inflation and interest rates.

Financial Strengths

The long-run gross leverage of 11-13 times. This is below pre-credit-crisis levels of above 25 times. Although Goldman remains highly leveraged, it has restructured as a bank holding company, and its access to government borrowing facilities decreases its short-term funding concerns. The balance sheet is also much cleaner now than before the recession and has a high amount of excess liquid securities. Recently, level 3 assets that are valued using inputs that are significant and unobservable were about 20%-25% of common equity compared with over 100% in 2008. Although you don’t have any immediate concerns in terms of solvency or liquidity, an investment bank’s financial health can turn rapidly for the worse if counterparties experience a crisis of confidence. Goldman Sachs’ regulatory capital ratios are healthy. At the end of 2021, the company had a 14.2% common equity Tier 1 capital ratio. The company targets a common equity Tier 1 ratio of 50 to 100 basis points above its requirements. This would currently equate to a common equity Tier 1 ratio of slightly over 14%, but a longer-term target of 13.50%-14.00%. All of Goldman’s capital ratios are well in excess of regulatory minimums. The company’s ability to return capital is determined by the Federal Reserve Board’s annual Comprehensive Capital Analysis and Review.

Bulls Say

  • More-stable investment management and net interest income could cause investors to reassess Goldman’s earnings quality and increase their willingness to pay a premium for it. 
  • The company’s trading operations can potentially do well in recessions and periods of economic uncertainty, which can buffer earnings. 
  • Several of the company’s primary U.S. and European competitors have been forced to restructure, which could give Goldman an opportunity to gain market share.

Company Description

Goldman Sachs is a leading global investment banking firm whose activities are organized into investment banking (20% of net revenue), global markets (45%), asset management (20%), and consumer and wealth management (15%) segments. Approximately 60% of the company’s net revenue is generated in the Americas, 15% in Asia, and 25% in Europe, the Middle East, and Africa. In 2008, Goldman reorganized itself as a financial holding company regulated by the Federal Reserve System.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

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Categories
Dividend Stocks

ABN Amro cannot pass on negative interest rates to smaller depositors without damaging client goodwill

Business Strategy & Outlook

After emerging from outright government ownership ABN Amro is one of the simpler banks in Europe. It is essentially a retail and commercial bank with limited capital markets activities. Its strong retail deposit base supported above-average profitability until negative interest rates started to bite. Having a lending book dominated by fixed-rate mortgages does not help either. The long-duration lending book forces ABN Amro to use more expensive long-term funding in order to manage liquidity risk, which then compounds margin pressure in a declining interest-rate environment. ABN Amro offers investors exposure to the oligopolistic Dutch banking system where ABN Amro and its two main rivals hold more than 90% of all Dutch current accounts. This is in sharp contrast to the fragmented banking markets that are the norm in much of the eurozone. Historically this concentration supported higher levels of profitability for ABN Amro and its Dutch peers.

ABN Amro has a solid competitive position in Dutch retail banking with a 20% market share in Dutch personal current accounts and a 25% share of business current accounts. This provides ABN Amro with cheap, sticky funding and forms the base from which ABN Amro can cross-sell other products. In a negative interest-rate environment what should be a major competitive advantage has turned into a major headache. In a negative interest-rate environment banks earn negative interest on their surplus liquidity and with essentially a zero interest-rate floor on some of their deposits this leads to a margin squeeze. The injection of liquidity via monetary and fiscal interventions from central banks and governments following the coronavirus pandemic has just amplified this problem as banks are faced with even more deposits from clients flush with cash. ABN Amro cannot pass on negative interest rates to smaller depositors without damaging client goodwill. It is increasingly passing on higher costs to larger clients. Interest-rate hedges only provide protection against interest-rate volatility, not to a long-term decline in interest rates, especially not when rates go negative.

Financial Strengths

Even after taking into considerations the more onerous capital guidelines under Basel IV ABN Amro is one of the best-capitalized banks in Europe that were covered. At the end of 2020 ABN Amro indicated that on a Basel IV basis it has a common equity Tier 1 ratio of over 15%, compared with its internal target of 13%.

Bulls Say

  • ABN Amro is one of the three leading banks in the oligopolistic Dutch banking sector. 
  • It has an attractive funding mix with low reliance on wholesale funding. 
  • It has a simple, clear, and focused business model and strategy.

Company Description

ABN Amro Bank is a Dutch bank, and the Netherlands accounts for around 90% of its operating profit. Operationally, retail and commercial banking contributes the bulk of its operating profit, while ABN Amro continues to reduce its exposure to corporate and investment banking. It views private banking as one of its key growth areas.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.