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

Pepsi faces risks that consumers spurn its fare in favour of healthier options

Business Strategy and Outlook

Pepsi’s strategy is seen, emphasizing growth in its core snacks (number one position) and beverages (number two position) businesses through expanding its addressable market and investing to align its mix with evolving consumer preferences (such as snacking as a meal substitute), favourably. Within snacks (55% of sales), Pepsi dominates the global competitive landscape (7 times its closest competitor, with five of the six top brands), and it is alleged its core brand development advantages–direct-to-store partnerships with retailers, innovation to align with consumer preferences, and data analysis–allow it to drive growth in its underlying categories. In experts view, Pepsi’s market position enables it to raise price without a lasting hit to volumes (and should continue to do so), given its troves of global consumer data. But the firm doesn’t just let its fare fend for itself. Rather, it spends to support its brands in a crowded space. In addition, investments to bolster its manufacturing capacity should further entrench its standing with leading retail partners in both physical and digital outlets, in experts opinion. 

In its beverage business (45% of sales), Pepsi is a strong number two player in an oligopolistic industry, and it is anticipated the firm can generate growth within the carbonated soft drink, or CSD, category and still beverages, such as sports (where it maintains dominant share), energy drinks (enhanced by its acquisition of Rockstar Energy), and bottled/carbonated water. It is likely, current innovation efforts, particularly to expand in low sugar CSDs and sports drinks, aligns with consumer preferences and leverages its strong brands. Pepsi faces risks that consumers spurn its fare in favour of healthier options and that online distribution grows, but it is surmised as, the firm is well positioned to manage these challenges. It is held for investments to reformulate products (without altering the taste profile) combined with the addition of healthier brands should appeal to consumers looking for wholesome products. In analysts view, Pepsi’s resources should ensure its fare wins regardless of the channel in which consumers opt to shop.

Financial Strength

It is held that Pepsi maintains solid financial health, which should enable it to support growth while also returning excess cash to shareholders. At the end of fiscal year 2021, the firm’s net debt/EBITDA stood at approximately 2.5 times, with approximately $40 billion of debt outstanding against nearly $6 billion in cash and investments. Debt maturities over the next three years approximate one-quarter of its outstanding debt balance, which is seen, Pepsi can cover with its cash on hand, the $3.5 billion in proceeds received in fiscal 2022 from the sale of Tropicana, and the $7.5 billion available through its revolving credit facilities. It is projected net debt/EBITDA will decline to 0.8 times by fiscal 2031. Pepsi’s balance sheet strength is buttressed by its strong cash flow generation, as analysts forecast free cash flow as a percentage of sales will average around 12% over the next 10 years (generally in line with historic levels). It is likely Pepsi will direct additional resources toward capital expenditures each of the next two years (equating to 5.5% of sales on average) in order to add manufacturing capacity for in-demand products, automate and digitize the supply chain, and invest in e-commerce before returning to its historic 5% average through the remainder of experts 10-year explicit forecast. However, it is not considered that elevated capital expenditures will come at the expense of its commitment to return excess cash to shareholders. Analysts forecast the firm will raise its dividend at a high-single-digit annual clip (maintaining a payout ratio of around 70%). It is also alleged that Pepsi will repurchase nearly 1% of shares outstanding on an annual basis, which is viewed to be a prudent use of cash when the stock trades below experts assessment of its intrinsic value. While it is likely the firm will also remain a consolidator in the space, experts don’t model future tie ups due to the uncertainty surrounding the potential size, timing, and valuation.

Bulls Say’s

  • Given its dominant share in Latin American snacks, more than 23% per Euromonitor, it is likely for Pepsi to benefit from favourable demographic and disposable income tailwinds in the region. 
  • Despite holding the top spot in global sports drinks, it is held Pepsi is poised for further category gains as it launches innovation aligned with evolving consumer trends, including for Gatorade Zero and Gatorade Light. 
  • It is alleged Pepsi’s robust cash flow generation affords the opportunity to invest in its brands, distribution, and capacity.

Company Profile 

PepsiCo is a leading provider of snacks and beverages globally with prominent brands including Pepsi, Mountain Dew, Gatorade, and Aquafina in the beverage space and Lays, Cheetos, and Doritos within snacks. The company maintains dominant share of the global snacks industry with six of the top 10 savoury snack brands and the number two position in the carbonated soft drink, or CSD, category globally along with key brands in bottled water and sports and energy drinks. Overall, the company earns 60% of its revenue and two thirds of its operating profit in North America, although it serves Europe, Latin America, Africa/Middle East/South Asia, and Asia Pacific through separate business units. 

(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 is 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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Too many fingers in too many pies, reduces Aegon’s focus

Business Strategy and Outlook

Aegon has had its share of problems over the last 13 years, averaging close to 4.4% return on equity over this period. That is well below the 11% cost of capital experts’ assign to the business. These struggles have stretched across capital, solvency, governance, management, and recurring nonrecurring items. Additionally, communication with the investment community was not good. However, it is seen, recent results show a change of direction in terms of strategy. 

Under the new leadership Aegon is focusing on four things to make it a materially better company. First, strengthening the balance sheet; management has already started this. Second, creating a more disciplined management culture with the move to quarterly from semi-annual reporting. This is another change which is welcomed. The charges investors saw in the first half of 2020 already show greater accountability. Third, improving efficiency, and fourth, increasing strategic focus, which is likely to be closely aligned. Management has spoken at length about Aegon’s geographical breadth and this is something which is emphasized to investors that is seen to be managerial distraction. Too many fingers in too many pies reduces Aegon’s focus. The United States and Netherlands have long been key to this business. Discussions on Portugal and Spain and the distribution partnership with Banco Santander lead us to believe these markets will remain core, though it remains preference to see an exit.

Financial Strength

Aegon management is on a debt drive and analysts really like this. Traditionally, Aegon has not been a highly leveraged business, steering into the financial crisis with a debt/asset ratio of well under 2%. During this period, Aegon delivered quite reliable earnings. As the global financial crisis ensued and Aegon took on EUR 3.0 billion of debt from the Dutch government, the company’s woes were exacerbated during the succeeding sovereign debt crisis; management drove a further deterioration of the balance sheet with an aggressive pursuit of joint ventures in Spain. Debt consequently increased to 3.5% of assets and was only marginally tempered until another round of poor transactions when management decided to acquire Mercer’s defined-contribution record-keeping business and a partial acquisition of La Banque Postale asset management. Balance sheet quality was further degraded with the purchase of BlackRock’s defined contribution platform and Cofunds a year later. Debt/assets reached a high of 3.6% of assets and interest payments on this debt reached 35% of earnings before interest. This served as a catalyst for mounting pressure from Dodge & Cox, Aegon’s long-term shareholder. Actions have eminently improved the shape of Aegon’s balance sheet and as at year-end 2021 Aegon reported a 2.6% debt/asset ratio.

Bulls Say’s

  • Aegon has shed peripheral businesses in Central and Eastern Europe. 
  • Debt repayment has been impressive. 
  • The new management team appears to be laying-out a strategy for the business.

Company Profile 

Aegon is a Netherlands-headquartered insurance company with core operations that stretch across the U.S., Netherlands, and United Kingdom. The business also holds peripheral ventures in Spain, Portugal, Brazil, and China. 

(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 is 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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Roche’s Tiragolumab Fails in Higher-Stakes Trial; Lowering Our FVE, but Shares Remain Undervalued

Business Strategy & Outlook

The Roche’s drug portfolio and industry-leading diagnostics conspire to create maintainable competitive advantages. As the market leader in both biotech and diagnostics, this Swiss healthcare giant is in a unique position to guide global health care into a safer, more personalized, and more cost-effective endeavor. Strong information sharing continues between Genentech and Roche researchers, boosting research and development productivity and personalized medicine offerings that take advantage of Roche’s diagnostic arm.

Roche’s biologics focus and innovative pipeline are key to the firm’s ability to maintain its wide moat and continue to achieve growth as current blockbusters face competition. Blockbuster cancer biologics Avastin, Rituxan, and Herceptin are seeing strong headwinds from biosimilars. However, Roche’s biologics focus (more than 80% of pharmaceutical sales) provides some buffer against the traditional intense declines from small-molecule generic competition. In addition, with the launch of Perjeta in 2012 and Kadcyla in 2013, Roche has expanded its breast cancer franchise, and Phesgo, a subcutaneous coformulation of Herceptin and Perjeta, is launching in the U.S. Gazyva, approved in CLL and NHL and in testing in lupus, will also extend the longevity of the Rituxan franchise. Avastin’s lung cancer sales are vulnerable to biosimilars and competition from new therapies Opdivo and Keytruda, but Roche’s own immuno-oncology drug Tecentriq launched in 2016, and the peak sales potential above $10 billion. Roche is also expanding outside of oncology with MS drug Ocrevus ($9 billion peak sales) and hemophilia drug Hemlibra ($6 billion peak sales).

Roche’s diagnostics business is also strong. With a 20% share of the global in vitro diagnostics market, Roche holds the number-one rank in this industry over competitors Siemens, Abbott, and Ortho.

Pricing pressure has been intense in the diabetes-care market, but new instruments and immunoassays have buoyed the core professional diagnostics segment.

Financial Strengths

Roche’s financial health remains robust. At the end of 2021, Roche’s net debt stood at CHF 18.2 billion, or 20% of total assets. Debt levels increased in late 2021 as Roche repurchased shares held by Novartis, but with debt maturities spread over the next several years, the firm will meet obligations easily. The estimated free cash flows north of CHF 15 billion annually over the next five years. The Roche to maintain a dividend payout ratio around 50% going forward, implying mid-single-digit annual

increases in dividends per share.

Bulls Say

  • Roche and its innovative U.S. arm Genentech have a solid history of generating blockbuster therapies in oncology, and Roche’s pipeline is full of novel candidates, with a particularly large late-stage pipeline. 
  • Hemophilia drug Hemlibra and MS drug Ocrevus have multi-billion-dollar sales and significant growth potential, further diversifying Roche’s revenue.
  • Collaboration between its diagnostics and drug development groups gives Roche a unique in-house angle on personalized medicine.

Company Description

Roche is a Swiss biopharmaceutical and diagnostic company. The firm’s best-selling pharmaceutical products include a variety of oncology therapies from acquired partner Genentech, and its diagnostics group was bolstered by the acquisition of Ventana in 2008. Oncology products account for 50% of pharmaceutical sales, and centralized and point-of-care diagnostics for more than half of diagnostic-related sales.

(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

Increase In Operating Expenses And Similar Decline In Rate Case Outcomes Underpins Decline Prediction For Exelon Corp

Business Strategy and Outlook

After spinning off its merchant generation and retail energy segment, Constellation Energy, through a distribution to Exelon shareholders, the new Exelon is now a pure-play electric and gas transmission and distribution utility providing investors a more stable earnings profile. The separation is considered positive for shareholders. A standalone regulated utility strengthens Exelon’s narrow moat and lowers the company’s cost of capital. Exelon’s regulated utilities support the current outlook for 7% earnings growth through 2026, the midpoint of the company’s 6%-8% earnings growth guidance. The company is estimated to spend $36 billion of capital investment through 2026. This investment plan supports the current earnings forecast and dividend growth in line with earnings growth. Exelon operates a diverse set of regulated utilities, including five utilities in the Northeast and the largest investor-owned utility in Illinois.

Regulatory relationships have at times been strained across its Northeast utilities, resulting in low allowed returns. Alternative recovery mechanisms help reduce regulatory lag and risk across the regions for Exelon’s growth capital. Low earned returns below allowed regulated returns should gradually increase to within management’s 9% to 10% goal. Relationships at the company’s most important subsidiary, ComEd, will likely remain strained given allegations of inappropriate lobbying practices tied to the passage of previous utility legislation. Exelon subsequently entered into a deferred prosecution agreement with federal prosecutors. Recent Illinois legislation will bring significant changes to the state’s regulatory framework. Current performance base-rate making, which ties allowed returns to the average 30-year Treasury rate, have produced some of the lowest returns among U.S. utilities. After 2023, Illinois utilities may opt in for a four-year rate plan beginning in 2024. Under the multi year plan, ComEd would be allowed to “true-up” earned returns to allowed returns and continue usage-decoupled rates. Regulators could issue incentives and penalties based on performance. The legislation will likely lead to higher returns for the subsidiary

Financial Strength

With over 4.0 times interest coverage, Exelon’s financial health is sound for a regulated utility, particularly given its stable, low-risk business model. With the current forecast for $36 billion of capital spending planned through 2026, Exelon will be a frequent debt issuer. The company has manageable long-term debt maturities and anticipated to be able to refinance its debt as it comes due, maintaining its current debt/capital ratio. The company is expected to issue $1.0 billion in equity to fund its capital investment plan, in line with management’s expectations. Total debt/EBITDA is expected to remain in the 4.5-5.0 times range. Exelon will target a 60% dividend payout ratio. Dividend growth is projected to remain in line with the current 7% annual earnings per-share growth forecast through 2026. 

Bulls Say’s

  • Exelon’s divestiture of its merchant generation eliminates its earnings sensitivity to cyclical commodity prices that have dragged down returns recently. 
  • Exelon has good regulated growth investment opportunities that should support earnings and dividend growth. 
  • Nearly all of the company’s growth capital is recovered through constructive regulatory mechanisms that reduce regulatory lag.

Company Profile 

Exelon serves approximately 10 million power and gas customers at its six regulated utilities in Illinois, Pennsylvania, Maryland, New Jersey, Delaware, and Washington, D.C.

(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 is 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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Admiral’s investments in proprietary tech have created returns that far exceed anything generated by its peers

Business Strategy and Outlook

Admiral is a rare example of an insurance company with a narrow economic moat. Furthermore, Admiral’s persistent competitive advantage is built on its proprietary technology intangible assets. Admiral’s investments in proprietary tech have created returns that far exceed anything generated by peers, and it has done so in a persistent and reliable way. These investments range from information technology hardware to software to data and Admiral’s latest round of investments have gone into probability-based machine learning that has then been built bespoke. This internal development and customisation of technology, to make it proprietary, is the reason behind Admiral’s market-leading profitable growth. Using its technology and data Admiral has been able to select the most profitable risks. And furthermore, it is the latest round of investments into artificial intelligence, Admiral seems well placed to drive improvements in its U.K. motor loss ratio. This is because Admiral has historically looked to select drivers that pay by credit card and one way to utilise probability-based learning is to predict fraudulent claims more accurately. This is done through analysis of interdependence between credit-based data features, which Admiral Loans is only likely to strengthen. 

Admiral has historically underwritten policyholders exhibiting higher risk. In its establishment, younger drivers and drivers based in London were all part of the business’ perimeter of nonstandard risks. On one side, Admiral’s historical preference for younger drivers further places the business at an advantage versus the rest. The live Financial Conduct Authority, or FCA, general insurance pricing rules aim to stamp out the practice of price walking, an activity that has been much more prevalent in older generations. Going further, Admiral’s latest round of investments add to its runway for success. Probability-based machine learning has high application when using inter-related data features to identify lower-risk policyholders within higher-risk datasets. Admiral’s perimeter of insuring urban-based nonstandard risk policyholders plays into this

Financial Strength

Admiral’s float investment strategy focuses on low-risk, low volatility, preservation of capital. Admiral typically does this by investing in government bonds, corporate bonds, private credit, cash and money market instruments. As at end-2021 Admiral held 69.3% of its full investment portfolio, excluding cash, in fixed income and debt securities. This has risen from 60.5% a few years ago. Admiral’s allocation to money market funds stands at 28.4% as at end-2021 and this is an allocation that the business has pared back from 35.9% since the same 2019 time frame. In full-year 2021 Admiral generated a 2.0% investment yield. In future it is anticipated that this will rise to 2.1% over 2022 and climb by 10 basis points on average per year until it reaches a long-term 2.5% rate. Across Admiral’s entire investment portfolio, also in 2022 the business will generate 0.7% of gains, with a 50% harvesting rate. It is forecasted these annualised investment gains will climb over the medium term to a long-term 1.4%. Admiral’s total long-term investment return will therefore settle at around 3.7%. On the surface, leverage appears to be one Admiral’s downsides. For example, up until 2013 the business looks like it performed well, maintaining financial prudence of zero debt level. In 2014 this debt started to rise with the July 2014 issuance of GBP 200 million in subordinated notes. These notes have a July 2024 redemption date and 5.5% fixed interest rate. Since 2017 Admiral’s leverage looks to have climbed but this is ultimately because of the 2017 formation of Admiral Loans. Since it was established, Admiral Loans has issued GBP 446.5 million in loan-backed securities that are backing Admiral’s sale of personal loans. Excluding this GBP 446.5 million as at end-2021, Admiral’s debt as a percentage of equity falls from 47.6% to 15.9%, which shows a much better profile. It is forecasted Admiral will reach around a 47.5% debt-to-equity level

Bulls Say’s

  • Admiral’s U.K. motor returns on new investment far outstrip anything achieved by peers, driven by its proprietary tech. 
  • Admiral still only holds a 15.5% share of the U.K. motor insurance market with a big ensuing industry shakeout. 
  • Admiral has a long runway for growth in U.K. home and international car segments, and significant room for improvement in these loss rates.

Company Profile 

Admiral is a personal lines insurance company that operates predominantly in the U.K. Primarily, the business is a motor insurer with the U.K. motor and international car business accounting for over 95% of Admiral’s gross written premiums. The business also has a nascent but growing U.K. household insurance division. When Admiral started out in 1993 the business was established to sell motor insurance to nonstandard risk policyholders. These nonstandard risks included younger drivers, women drivers, drivers wanting to pay by credit card, and drivers based in London. Over the years Admiral has continued to expand its wheelhouse of nonstandard risk selection.

(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 is 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

Ferguson set out to clean up its balance sheet following the great financial crisis

Business Strategy and Outlook

 Ferguson primarily serves three major end markets: repair and remodel (Ferguson refers to this market as repair, maintenance, and improvement), new construction, and civil infrastructure. Between 2008 and 2020, Ferguson’s exposure to the U.S. RMI market (as a percentage of sales) increased from 31% to 60%, while U.S. new construction revenue exposure decreased from 58% to 32%. It is forecasted that the U.S. R&R spending to grow at a 4%–5% compound annual rate this decade. While R&R spending surged during the pandemic, and don’t think demand for home projects is set to stall. Instead, it is believed that the pandemic stepped sales up to a structurally higher base for more normalized growth going forward. In terms of U.S. residential construction, it is believed to have a 1.6 million-unit production pace is maintainable for much of the decade, and the forecast is 15.7 million cumulative starts between 2022 and 2031.

Ferguson has built leading positions across most of its end markets through its roll-up acquisition strategy. The company typically acquires local competitors, gaining access to new brands, suppliers, regions, and customers. It is expected that Ferguson will continue to this strategy, which should augment its scale-driven competitive advantage. Ferguson’s pricing strategy has transformed from being primarily localized to more standardized across the group over the past decade. In the past, branch managers had more discretion over pricing in order to react to local competitive dynamics. Today, the company employs a more disciplined approach to pricing, allowing it to take better advantage of its economies of scale. Ferguson sold its Wolseley U.K. business for approximately $420 million in February 2021. This business struggled to generate value for the group despite being one of the largest distributors in the United Kingdom. There were very few synergies between geographies and little overlap in suppliers. Ferguson’s strategic shift to the United States will be a tailwind for the firm’s prospects, and  Ferguson’s primary listing on the New York Stock Exchange could increase interest from U.S. investors.

Financial Strength

Ferguson set out to clean up its balance sheet following the great financial crisis, and its improved net debt/EBITDA from 3.5 times before the 2008 crisis to 0.8 times as of Jan. 31, 2022. Net debt at the end of the second quarter of fiscal 2022 (January 2022) was $2.2 billion. Ferguson’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy that augments growth with acquisitions but also returns cash to shareholders. In terms of liquidity, it is believed that the company can meet its near-term debt obligations, given its strong cash balance. Its cash position at the end of the second quarter of fiscal 2022 stood at $828 million. It also found comfort in Ferguson’s ability to tap available lines of credit to meet any short-term needs. Also, it was encouraged by the countercyclical nature of industrial distributors’ free cash flow generation, which results from the ability to drawdown inventory during times of economic malaise. Ferguson generated over $1 billion of free cash flow during the great financial crisis, and is expected that the current economic weakness to push free cash flow levels materially higher as working capital requirements ease.  Ferguson enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say’s

  •  Ferguson’s roll-up strategy in the U.S. should lead to market share gains, boosting revenue growth in excess of the market average. 
  • Ferguson’s strategic shift to the U.S. away from international markets has strengthened group operating margins. 
  • Ferguson generates strong free cash flow throughout the economic cycle despite serving cyclical end markets

Company Profile 

Ferguson distributes plumbing and HVAC products primarily to repair, maintenance, and improvement, new construction, and civil infrastructure markets. It serves over 1 million customers and sources products from 34,000 suppliers. Ferguson engages customers through approximately 1,600 North American branches, over the phone, online, and in residential showrooms. In fiscal 2021, Ferguson derived 94% of its nearly $23 billion of sales in the U.S. According to Modern Distribution Management, Ferguson is the largest industrial and construction distributor in North America. The firm sold its U.K. business in 2021 and is now solely focused on the North American market.

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 is 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

NAB: The board declared a fully franked interim dividend per share of 73 cents, up 6 cps.

Investment Thesis:

  • NAB is trading on an undemanding valuation, with 1.6x Price to Book (P/B) and dividend yield of 4.8%. 
  • All else being equal, NAB is offering an attractive dividend yield on a 2-yr (5.2%) and 3-Yr (5.6%) view. 
  • Strong oligopoly position in Australia (along with three other major banks in CBA, ANZ, WBC).
  • Strong management team and Board.
  • Macro environment to be both a tailwind and headwind – a rising interest rates environment to be both positive and negative in that while it will enable banks to charge more for loans, it also could result in deterioration in asset quality, slower loan growth, as well as higher inflation and wage growth to be detrimental to costs expense.
  • Well capitalized after the capital raising.
  • Though management is cautioned to expect cost to increase, it is highlighted NAB’s strong franchise model with management capable of improving below a 40% cost to income ratio.
  • Potential pressure on net interest margins as competition intensifies with other major banks. Though these pressures to slightly alleviate as it can move into a higher interest rate environment.
  • Improving return on equity with management proving their abilities in recent times to manage profitability in a low interest rate environment.
  • Strong provisioning coverage.
  • A well-diversified loan book.

Key Risks:

  • Impacts from Covid-19 are more severe than already provisioned for.
  • Low growth environment impacting earnings.
  • Potential cuts or reduction to dividends due to low earnings growth. 
  • Intense competition for loan and deposit growth.
  • Normalizing / increase in bad and doubtful debts or increase in provisioning.
  • Funding pressure for deposits and wholesale funding (increased funding costs).
  • Any legal fees, settlements, loss or penalties associated with ASIC or US-based law suits.

Key Highlights:

  • Statutory net profit of $3,551m, up +10.7%. Cash earnings up +3.7% to $3,480m. Underlying profit of $4,865m was up +6.3%.
  • Net operating income of $8,828, up +4.6%. Revenue increased +4.6%, driven by higher volumes, increased fees and commission income, offset by lower margins. Net Interest Margin (NIM) declined 11 basis points (bps) to 1.63%, (or excluding the impact from and Treasury and higher holdings of liquid assets, NIM declined 3bps), reflecting competitive pressures and mix issues in housing lending, partly offset by lower deposit and funding costs.
  • Operating expenses was up +2.6% at $3,963m (but flat relative to 2H21), driven by additional bankers and resources to support growth, combined with salary increases and investment in technology, partially offset by productivity benefits achieved through simplification and third-party savings, and lower occupancy costs.
  • NAB’s 1H22 credit impairment charges were $2m, compared to a 1H21 write-back of $128m reflecting increased charges for forward looking provisions combined with an underlying write-back. 1H22 charges for forward looking provisions of $67m (includes a $131m top-up to the economic adjustment to reflect increased downside risks such as potential impact of higher inflation and interest rates, partly offset by a net $64m from target sector forward looking adjustments).
  • Common equity tier 1 ratio of 12.48% is 52bps lower than the pcp, as NAB completed a $2.5bn buy-back but remains above the Bank’s targets. Pro forma CET1 ratio of 11.65% includes the estimated impacts of the proposed acquisition of the Citigroup Australian consumer business (~31 bps), further $2.5bn on-market share buy-back (~58bps) and proceeds from the BNZ Life divestment (~6bps).
  • The Board declared a fully franked interim dividend per share of 73 cents, up 6cps. Cash payout ratio of 68.3% was 30bps lower.
  • Business & Private Banking. Cash earnings of $1,429m was up +17.5% driven by strong growth in lending and deposit volumes, broadly stable margins and a rise in fee income, lower credit impairment charges partially offset by higher operating expenses (NAB added further resources to support growth and invested in technology).
  • Personal Banking. Cash earnings of $788 was -8.3% weaker due to lower credit impairment write-backs, reduced revenue given competitive pressures and mix shift in the housing lending portfolio, partially offset by lower operating expenses benefitting from productivity and the sale of the broker aggregation business in 1H21.
  • Corporate & Institutional Banking. Cash earnings of $806 was up +3.1 due to strong growth in lending and deposit volumes, higher Markets and fee income, partially offset by lower credit impairment write-backs and higher operating expenses.
  • New Zealand Banking. Cash earnings of NZ$ 668m was up +8.4% reflecting growth in lending and improved margins, partly offset by higher operating expenses and an increase in credit impairment charges.

Company Description:

National Australia Bank Limited (NAB) is one of Australia’s largest banks, with majority of their financial service businesses operating in Australia and New Zealand. The bank also has a presence in Asia, UK and the US. NAB offers banking services, credit and access card facilities, leasing, housing and general finance, international and investing banking, wealth and funds management, life insurance and custodian, trusts and nominee services.  

(Source: Banyantree)

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

Telefonica Brasil Posts Solid Customer Growth, but Costs Pressure the Business

Graphic of investment stock market data analysis business

Business Strategy & Outlook

The Telefonica Brasil (Vivo) is one of the strongest telecom carriers in Brazil, vying with America Movil to offer converged wireless and fixed-line services across much of the country. But the market faces several challenges, including stiff competition, a fragmented fixed-line industry, and general economic weakness that has also hurt the value of the Brazilian real in recent years. The plan to carve up Oi’s wireless assets appears to be nearing completion, promising to significantly improve the industry’s structure, cutting the number of wireless players to three. While results will likely remain volatile, Vivo will prosper as Brazilians continue to adopt wireless and fixed-line data services.

Vivo is the largest wireless carrier in Brazil by far, holding 33% of the wireless market, including 37% of the more lucrative postpaid business. The firm generated about 60% more wireless service revenue in 2020 than America Movil or TIM, its closest rivals. The three carriers have agreed to split up the wireless assets of Oi, the distant fourth-place operator that has been in bankruptcy protection. If successful, the transaction would remove a sub-scale player from the industry. With three large carriers remaining, the competition will grow increasingly rational, solidifying the pricing discipline seen recently. Vivo’s share would also expand to about 38%, adding additional scale that should benefit margins and returns on capital.

In the fixed-line business, Vivo has struggled recently. Its share of the broadband business has slipped to 15% from 27% five years ago as it has lost customers in areas where its network is older and less capable and upstarts are investing aggressively to build fiber. Vivo is investing aggressively as well, though, at its own fiber network now reaches nearly 20 million homes, nearly 30% of the country. The firm has numerous initiatives in place, including an infrastructure joint venture, with plans to build to nearly 10 million by the end of 2024, but it remains to be seen how many carriers will be vying for these customers with networks of their own.

Financial Strengths

Vivo’s financial health is excellent, as the firm has rarely taken on material debt. The net debt load increased to BRL 4.4 billion following the acquisition of GVT in 2015, but even this amounted to less than 0.5 times EBITDA. Cash flow has been used to allow leverage to drift lower since then. At the end of 2021, the firm held BRL 500 million more in cash than it has debt outstanding, excluding capitalized operating leases. Even with the capitalized value of operating lease commitments, net debt stands at BRL 10.4, equal to 0.6 times EBITDA. Even after funding its share of the Oi transaction and assuming no incremental benefit to EBITDA, net financial leverage would stand at only 0.8 times.

Parent Telefonica has control of Vivo’s capital structure. While Telefonica’s balance sheet has improved markedly in recent years, the firm still carries a sizable debt load and faces growth challenges in its core European operations. Vivo aims to pay out at least 100% of net income in dividends and the distribution has averaged BRL 5.5 billion annually over the past three years. The firm plans to pay out BRL 6.3 billion in 2022. If the business hit a rough patch, though, the dividend may not prove to be in shareholders’ interest relative to other uses of cash. For Telefonica, though, moving cash up to the parent directly helps its balance sheet.  Fortunately, dividend growth isn’t sacrosanct. Reported net income declined in 2019 and the payout in 2020, based on the prior year’s income, declined about 15%. The dividend declined another 7% in 2021 based on 2020 earnings. These cuts have come despite ample free cash flow generation. To calculate the dividend would have consumed only 55% of 2020 free cash flow if the 2019 payout had been maintained. Vivo also has a share buyback program but repurchases have been minimal recently. The firm repurchased BRL 496 million in 2021, by far it largest outlay over the past several years. The buyback in 2022 is again expected to be around.

Bulls Say

  • Vivo is the largest telecom carrier in Brazil and benefits from scale-based cost advantages in both the wireless and fixed-line markets.
  • The firm is well-positioned to benefit as consumers demand increased wireless data capacity. Its network in Brazil is first-rate and its reputation for quality is second-to-none.
  • Owning a high-quality fiber network enables Vivo to offer converged services throughout much of the country, while buttressing its wireless backhaul, improving network speeds and capacity.

Company Description

Telefonica Brasil, known as Vivo, is the largest wireless carrier in Brazil with nearly 85 million customers, equal to about 33% market share. The firm is strongest in the postpaid business, where it has 50 million customers, about 37% share of this market. It is the incumbent fixed-line telephone operator in Sao Paulo state and, following the acquisition of GVT, the owner of an extensive fiber network across the country. The firm provides internet access to 6 million households on this network. Following its parent Telefonica’s footsteps, Vivo is cross-selling fixed-line and wireless services as a converged offering. The firm also sells pay-tv services to its fixed-line customers.

(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

Hannover, a Rare Moat in Reinsurance

Business Strategy & Outlook: 

Hannover Re is a property and casualty, and life and health reinsurer with property and casualty contributing a little over two thirds of the company’s profits to shareholders. Hannover Re has a slightly less than double-digit market share in both these divisions. This is a business that is characterized by underwriting and carving the deep expertise in niche areas. While this may sound a bit woolly, but it is observed that some of this underwriting difference comes from the overall ownership of the underwriting process by Hannover Re’s underwriters. This is conceptualized through lenses of decision-making and responsibility. Whereas in other reinsurance firms, underwriters may need to defer back to a head of risk or perhaps even the c-suit, underwriters at Hannover Re have the authority, experience, and expertise to make and take those decisions more directly. With more of these decisions being made closer to the front line it is believed that this leads to better standards of underwriting. Furthermore, this leads to stronger client relationships. Because underwriters are client-facing and thus renewals a reiterative negotiation, with Hannover Re’s underwriters in the position to directly negotiate and discuss client needs without the need for constant deferral, clients feel and are more connected to Hannover Re and this drives stronger retention rates. The stronger retention drives lower commission and acquisition costs. In addition to the culture of excellence in underwriting with a proven reputation for expertise in specialist lines, Hannover Re benefits from an expense advantage and these two benefits are aligned. For example, with deeper and stronger expertise in underwriting, Hannover Re retrocedes less than comparable European reinsurance companies. As the business has the institutional capacity to absorb this internally with regard to its frontline, coupled with the lower levels of internal referrals that are outlined, Hannover Re supports more premium per employee than other comparables. The outcome of this is tangible with the business benefiting from at least a 100-basis-point expense ratio advantage.

Financial Strengths:

Hannover Re has a good balance sheet. Leverage is quite low with debt standing at around EUR 3.4 billion. That stands in contrast to equity owned by shareholders of EUR 10.9 billion. Admittedly, of that EUR 2.3 billion is attributable to gains on securities classified as available for sale. Hannover’s balance sheet is weakest with the largest part of Hannover’s market risk attributable to default and spread risk. This relates to Hannover’s allocation to credit. Of the EUR 14.2 billion held in corporate bonds, EUR 7.8 billion is held around investment-grade. The shape of the government and semi-government bond portfolios is much more appealing. Hannover has also substantially increased its allocation to equities. Goodwill is however nice and low. Overall, this is a balance sheet that has room for quite a bit of improvement. This does not fit in with the typical corporate culture at Hannover Re. The quality of the credit portfolio is also a little light. But in the main this is a business that is not highly leveraged and is very financially disciplined.

Bulls Say: 

  • Hannover Re has a strong culture of expertise and experience in specialist underwriting.
  • Hannover Re is a cost leader with one of the lowest proportional amounts spent on administrative expenses.
  • Hannover Re focuses on organic growth rather than acquisitions. This not only comes through in its lean structure and lower expenses, but also in its approach to capital management and distributions to shareholders.

Company Description: 

Hannover Re is a German-based reinsurance company with a strong reputation in writing specialist lines of reinsurance and a low-cost operating model. The business and its management team are highly disciplined, rarely ever making an acquisition and favouring a strategy of specials over a commitment to a buyback when looking to return excess capital to shareholders.

(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

BASF Is the World’s largest Chemical Company

Business Strategy & Outlook:  

BASF is the world’s largest chemical company, competing in almost every major chemical category. Given its German roots, around half of sales are generated in Europe, but investment is largely focused on higher-growth emerging markets, particularly China. End markets are widely diversified between industrial uses, energy, and transportation, but also fewer cyclical areas such as consumer goods and agriculture. The company was built on the production of basic commodities such as petrochemicals. However, its current strategy targets a shift toward speciality chemicals and customized solutions. This is viewed as a wise endeavour, given the increased pricing power and lower cyclicality typically associated with speciality chemicals. 

BASF’s traditional chemicals business includes the chemicals (35% of EBIT), materials (29% of EBIT), industrial solutions (12% of EBIT), surface technologies (10% of EBIT), and nutrition and care (6% of EBIT) segments. The chemicals and materials segments produce basic commodities and represents the core of BASF’s Verbund production concept, a key competitive advantage. The company’s massive Verbund production sites integrate several plants together, generating approximately EUR 1 billion in cost savings per year. The latter three segments are weighted toward speciality products with particularly strong competitive positions in catalysts and consumer care chemicals. BASF’s agricultural solutions segment (8% of EBIT) is focused on crop protection such as fungicides and herbicides. However, the company entered the seeds business in 2018 via purchasing the regulatory-mandated divestments in the Bayer-Monsanto acquisition. While no cost synergies are expected, as this was a rare opportunity for BASF to gain critical mass in the attractive seeds market.

Financial Strengths: 

BASF’s balance sheet is strong. The model-driven credit risk assessment is low. The company has a conservative financial policy and targets an A credit rating, which shall continue. As of 2021, the company had total net debt of EUR 14 billion, excluding pension liabilities. Net debt/EBITDA declined to 1.2 times in 2021. The company’s debt maturity profile is balanced. The company is strongly committed to the dividend and targets an increase every year. However, the payout ratio is getting high compared with BASF’s cyclicality. The company typically has the balance sheet capacity to support the dividend. However, an extended economic slump would likely lead to a dividend cut.

Bulls Say: 

  • BASF is shifting its portfolio toward speciality chemicals and customised solutions, which should increase pricing power and reduce cyclicality.
  • Development of the battery materials business and the China Verbund should ensure long-term growth is adequate.
  • The company’s Verbund production process enables strong returns, despite higher costs for oil-based raw materials compared with peers with better access to low-cost natural gas markets.

Company Description: 

Based in Germany, BASF is the world’s largest chemical company, with products spanning the full spectrum of commodities to specialities. In addition, the company is a strong player in agricultural crop protection. Given its sheer size, BASF has a top-three market position in 70% of its businesses.

(Source: Morningstar)

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