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

Itaú Should Benefit From Rising Interest Rates, but Uncertainty in Brazil’s Economy Still a Concern

Business Strategy & Outlook

The challenge for Itaú Unibanco will be to navigate an increasingly volatile Brazilian economy and uncertain political environment, which has been hit by the dual shocks of the pandemic and rapidly rising inflation, which exceeded 12% in April 2022. In response, the Brazilian central bank has rapidly increased interest rates, taking the SELIC rate from 2% at the start of 2021 to 13.25% by June 2022. The bank benefits from rising interest rates, as Brazil’s central bank attempts to fight inflation, but there is risk that economic fallout from rapidly increasing rates could lead to lower loan growth and higher credit losses for the bank. As pandemic conditions have eased, Itaú has refocused on individual lending, driving the bank’s impressive loan growth during 2021 and so far in 2022, with credit cards and mortgages leading the way. With a slew of government guarantee programs for small and midsize enterprises and fiscal stimulus spending, the bank’s credit costs during the pandemic have been surprisingly low. However, these same programs have contributed to Brazil’s growing inflation and budgetary issues, which now must be reined in through severe interest rate increases. While one does expect credit costs to normalize over time, low charge-offs and a surge in deposits have allowed Itaú to expand its loan book significantly. 

Itaú Unibanco appears to be positioning itself as a regional money center in Latin America, with operations across Chile, Uruguay, Paraguay, Colombia, and Argentina. Though there are difficulties in such an approach, the bank has been able to diversify its asset growth and simultaneously reduce its exposure to the notoriously volatile Brazilian real. With nearly 30% of loans outstanding held abroad, the bank is in position to benefit from Latin American emerging-market growth. However, in the near to medium term Itaú’s results will be impacted by Brazil’s struggles as the country heads into the 2022 election cycle. Itaú faces a more hostile approach from regulators in recent years, with the central bank’s efforts to increase competition through the launch of the successful Pix payment system and support for the open banking movement.

Financial Strengths

Itaú Unibanco has a common equity Tier 1 ratio of 11.1% as of March 2022. The bank’s Tier 1 ratio is 12.5%, as it holds 1.4% of additional Tier 1 capital in hybrid debt and equity securities. While management has said at times that the bank has been overcapitalized, that Itaú has done well to avoid increasing leverage at a time when Brazil’s economic prospects were challenged. The strong capitalization entering the recent crisis permitted the bank to expand its aggregate loan book by more than 15% during 2021 after growing nearly 22% in 2020. Net charge-offs for the bank have been low, a result of government guarantees and fiscal stimulus, which to normalize as the impact of the central bank’s interest rate hikes is felt in the Brazilian economy. That said, Itaú is in a decent position to withstand higher credit costs as its balance sheet is in good shape.

Bulls Say

  • Rising interest rates in Brazil create an opportunity for Itaú to expand its net interest margin. 
  • Itaú has been able to significantly expand its foreign lending operations, diversifying the bank and reducing its exposure to the volatile Brazilian market. 
  • Credit losses in Brazil remain well below historical norms, allowing Itaú to generate good returns on its lending operations.

Company Description

Itaú Unibanco is the largest privately held bank in Brazil, the result of the 2008 merger between Banco Itaú and Unibanco. In addition to Brazil, the bank has significant operations in Chile, Colombia, Argentina, Uruguay, and Paraguay. Its commercial and consumer loans account for 36% of the bank’s total loans each, while foreign loans now account for 28% of the bank’s portfolio. Itaú also operates the fifth-largest insurer in Brazil and is the second-largest asset manager in the country, giving it broad reach over the Brazilian financial 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.

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

HSBC Q2 Results Solid; Interim Dividend Reinstated in 2023

Business Strategy & Outlook:    

HSBC’s strengths are its positions in the U.K. and Hong Kong banking systems. As China, Hong Kong, and Singapore are important pools of wealth and growing trade corridors, the bank’s pivot toward Asia, which makes up about 75% of pretax profit, makes strategic sense. The focus is on deepening relationships with customers across its existing geographies, and leverage the bank’s international network in bringing in new clients. According to the bank, its banking network addresses 90% of global trade and generates about 40% of the bank’s revenue. The broad geographic nature of its business model results in reduced pretax profit volatility versus peers, as evident during the global financial crisis, but comes with higher capital requirements.

Over the past few years, the bank restructured and exited unprofitable markets and low-returning regions. However, the restructuring was not enough and the bank struggled in global banking and markets, Europe, and the U.S. To address these issues, the bank announced another restructuring plan at the end of 2019. The restructuring is proceeding as planned with USD 104 billion of the risk-weighted assets redeployed or reduced at the end of 2021. A target of USD 120 billion by 2022 is achievable. Close to USD 3.3 billion in cost has been taken out of the business and the completion of the USD 5.5 billion program is expected by 2022. Cost savings is expected to be generated from digitalization, resulting in automation, a decline in headcount from operations and technology, and reduced office footprint. The restructuring plan allows HSBC to focus on its strengths in Asia and the U.K., the Asia region is growing in terms of importance for global trade, increased urbanization, and a growing middle class. The bank’s strengths in Hong Kong position it well to take advantage of growth in the Pearl River Delta, given it is the leading international bank in China. The latter is achieved through the bank’s long operational history and investments in China. As a result, HSBC is well positioned to capture economic growth in asset management, yuan internationalization, and consumer and corporate lending.

Financial Strengths:  

Much attention has been paid to HSBC’s dividend and its ability to return capital. HSBC to be in good financial health. Risk-weighted assets have declined as the bank improved its capital efficiency and redeployment of USD 100 billion in RWA, by 2022, is expected to lift profitability. RWA intensity has already declined to below 30s at the end of 2020 from above 40% in 2014. The common equity Tier 1 ratio was 13.6% at the end of second-quarter 2022. Management expects to maintain the common equity Tier 1 ratio at a range of 14% to 14.5% in the long term. With the coronavirus situation improving, the U.K. regulator is allowing U.K. banks to reinstate its dividends in 2021. HSBC provided an updated dividend policy of 40% to 55% of reported earnings per share applies from 2022, compared with a fixed dividend of USD 0.51 per share previously. A share buyback of USD 2 billion was announced in 2021 and completed in early 2022, and a further USD 1 billion buyback was announced at the end of 2021 to begin in April 2022. The common equity Tier 1 ratio of 13.6% at end of the second quarter is below the bank’s target of 14% to 14.5%, and this may dip below 14% in the third quarter due to the divestment of its French retail business and acquisitions. Profitability to drive a higher common equity Tier 1 ratio from 2023, and expected further capital management initiative in 2023. The bank’s liquidity position is also strong. Customer deposits make up around 60% of group funding, equity at 10%, and the balance from the wholesale debt and trading liabilities. The bank’s liquidity coverage ratio and net stable fund ratio both exceed regulatory requirements.

Bulls Say:

  • HSBC’s exposure to the fastest-growing economies ensures robust demand for its products and services, from deposits and wealth management to international trade finance.
  • The benefits of geographic diversification were highlighted during the financial crisis. Although HSBC took large losses in its North American segment, its other operations picked up the slack, and the bank escaped without reporting a loss.
  • HSBC has been operating in many banking systems for decades, building up a deep well of local knowledge and relationship that is hard to duplicate.

Company Description:

Established in 1865 in Hong Kong, London-based HSBC is one of the largest banks in the world with assets of USD 3 trillion and 40 million customers worldwide. It operates across 64 countries with around 220,000 full time staff. Key regions include Asia, Europe, the Middle East and North Africa, and North America. United Kingdom and Hong Kong are the two largest markets for the bank. The bank offers retail, commercial and institutional banking, global banking and markets, wealth management, and private banking.

(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

Recession-Resistant McDonald’s Offers Attractive Restaurant Exposure Amidst Tough Times

Business Strategy & Outlook:    

As the leader in global food-service sales, McDonald’s is taking adequate steps to adjust to an evolving competitive landscape, leveraging its scale to invest heavily in digital acuity and menu innovation en-route to compelling unit economics. A turbulent couple of quarters amidst a quickly deteriorating macroeconomic environment (and a stubbornly persistent global pandemic), and encouraged by management’s vision for the business, which should enable McDonald’s to maintain its edge. The firm has widely embraced customer centricity and technological prowess since its 2015 turnaround, and while the processes have evolved since then, the firm’s focus on the customer experience has not. Recent initiatives, including the loyalty program launch, a large breast chicken sandwich line, and test-marketing a McPlant burger, attest to a more finely tuned sense of market demands. Though the velocity growth plan laid the groundwork for better products and unit-level performance, that management’s new “Accelerating the Arches” framework better capitalizes on the firm’s cost advantages in marketing and technology investments. The plan focuses on a unified marketing approach, a commitment to the core menu, and an emphasis on the three D’s: delivery, digital, and drive-thru. 

With nearly a third of orders now coming through digital channels, that the pivot is warranted and see long-term upside through labor efficiency, improved order accuracy, and suggestive selling, particularly following a year that saw mid-teens labor cost inflation in the industry. With the notoriously slow-moving restaurant industry forced to make widespread investments in technology in 2020 and 2021, omnichannel ordering capabilities to become a required offering from larger players. McDonald’s mobile application, loyalty program, and recent efforts toward order automation and suggestive selling represent steps in the right direction, with customization, targeted promotions, and increased penetration of the delivery channel offering alluring opportunities to the operators able to get ahead of the curve.

Financial Strengths: 

McDonald’s financial strength as sound, with the firm maintaining an investment-grade credit rating and reasonable leverage relative to its competitive set. Debt/EBITDA clocked just north of 3 turns at year-end 2021 (within the long-term guidance range of 3-3.5 times). Solid free cash flow generation (averaging 42% of revenue through 2024) and high EBIT coverage of interest payments (nearly 8 times for 2022) should be more than sufficient to meet near-term obligations while leaving investment plans and dividends untouched. While they acknowledge differences in financing philosophies with private equity ownership, McDonald’s sports substantially lower leverage than Restaurant Brands International and Yum Brands, two of its largest peers in the QSR space, which operate with around 5-6 times debt/EBITDA. The company’s commitment to maintaining an investment-grade credit rating strikes us as prudent, with corporate strength tending to correspond to more attractive franchisee borrowing rates (and increased unit-level profitability), bolstering the brand intangible asset. Finally, the firm maintains substantial cash flow flexibility, with clearly demarcated priorities of growth capital investment, payment of common stock dividends, and share buybacks. The forecasted total returns to shareholders of $19.9 billion between 2022 and 2024 and recognize that $6.5 billion in modeled share buybacks during that period provides a healthy cushion that could easily be repurposed to meet debt service or pursue attractive investment opportunities. With stability of cash flows driven by an increasingly franchised model and well-matched future minimum rent receipts and debt service payments.

Bulls Say: 

  • With 65% of global stores featuring a drive-thru and more than 80% of stores offering home delivery, McDonald’s is well positioned to take advantage of evolving ordering habits.
  • Technological investments and the ongoing rollout of the firm’s loyalty program leverage McDonald’s scale and could positively drive average check and brand affinity.
  • As the low-cost operator in the space, input cost inflation and consumer pressure offer McDonald’s a chance to gain share in key markets.

Company Description: 

McDonald’s is the largest restaurant owner-operator in the world, with 2021 system sales of $112 billion across more than 40,000 stores and 119 countries. McDonald’s pioneered the franchise model, building its impressive footprint through partnerships with independent restaurant franchisees around the world. The firm earns more than 60% of its revenue from franchise royalty fees and lease payments, with the remainder coming from company-operated stores across its three core segments: the United States, internationally operated markets, and international developmental/licensed markets. McDonald’s owned 55% of the real estate and 80% of the buildings in its franchise system as of the end of 2021, offering it substantial leverage in maintaining quality standards and consistency.

(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

Williams Has an Attractive Collection of Gas Projects Over the Next Decade

Business Strategy & Outlook

Williams Companies has shifted its strategy in recent years to focus on organic growth investments that improve the returns and competitive position of its legacy assets. This is a positive for investors, creating a more stable financial profile and more high-return growth opportunities than most of its midstream peers. Clean energy investments could become a material growth area in the next few years, with the recent Orsted partnership a particularly attractive growth engine for its Northwest portfolio. With nearly half of its earnings and cash flow coming from rate-regulated gas pipelines, Williams increasingly looks more like a utility than an energy company. Williams delivered steady performance through turbulent energy markets the last two years, relying on its largely fee-based, long-term contracted revenue and strategically well-positioned assets. The recent acquisition of Sequent looks well timed, as marketing profits have well exceeded expectations in 2022. Most of Williams’ growth will continue to be directed toward its Transco gas pipeline, which runs from the Gulf Coast to the Northeast. Transco links low-cost gas supply in the Gulf Coast and Marcellus shale to high demand for retail use, LNG exports, gas power generation, and increasing industrial gas demand. Specifically, Williams is developing seven bcf/d of projects related to LNG and five bcf/d for power generation and industrial gas opportunities. The Transco capacity will reach 21 bcf/d by 2023 from 10 bcf/d in 2014 and continue to grow as natural gas demand in the eastern U.S. grows. With more than 100 bcf/d in interconnects and regulatory hurdles for competing projects, Transco faces no major competitive threats. Williams’ other businesses are demonstrating their favorable competitive positions with steady results through volatile energy markets. The Northeast gathering and processing business has a captive customer base in low-cost producing regions. The Northwest pipeline benefits from steady demand from utilities and supply from producers in the Western U.S. Williams is growing and improving the competitive position of its other assets through upstream partnerships.

Financial Strengths

Williams has strengthened its balance sheet and dividend coverage in recent years. Leverage has fallen to 3.9 times at the end of 2021 from over 5 times in 2016, and to continued declines over the next few years. Its improved credit profile and long-term, fixed-fee contract structures gives Williams financial flexibility to pursue growth investment opportunities, grow the dividend, keep the balance sheet strong, and execute its $1.5 billion share repurchase plan initiated in September 2021. The Trace Midstream deal for $933 million has consumed Williams’ excess cash and then some in 2022, but buybacks could exceed $400 million annually in 2023 and 2024. Williams can maintain steady dividend growth even through short-term energy market volatility. Williams has raised its dividend to $1.64 in 2021 from $1.20 in 2017 while strengthening its balance sheet. One can expect 3%-4% dividend increases going forward. The 2018 consolidation of Williams Partners and elimination of incentive distribution rights resulted in a shadow dividend cut of about 17% for former Williams Partners unitholders. The flip side was an improved credit profile, higher dividend coverage, and the ability to invest in growth without issuing equity. The long-running legal dispute between Williams and Energy Transfer over Energy Transfer’s alleged breach of its merger agreement appears to be close to an end. After repeated arguments since 2016, Williams won a $410 million settlement plus fees and interest in December 2021. However, the settlement can still be appealed to the Delaware Supreme Court.

Bulls Say

  • A large, well-positioned network allows Williams to invest in high-return growth projects with minimal regulatory hurdles. 
  • After several years of structural and financial moves, Williams is positioned to maintain steady dividend growth for the foreseeable future. 
  • Williams is leveraged to U.S. LNG exports via agreements with LNG terminals as a key supplier of gas.

Company Description

Williams is a midstream energy company that owns and operates the large Transco and Northwest pipeline systems and associated natural gas gathering, processing, and storage assets. In August 2018, the firm acquired the remaining 26% ownership of its limited partner, Williams Partners.

(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

Circling Back to U.S. Bancorp After Q2 Earnings; Decreasing The Fair Value Estimate to $59 From $60

Business Strategy & Outlook

U.S. Bancorp is one of the strongest and best-run regional banks. Few domestic competitors can match its operating efficiency, and for the past 15 years the bank has consistently posted returns on equity well above peers and its own cost of equity. U.S. Bancorp’s exposure to moaty nonbank businesses and its consistently excellent core banking operations make us like the company’s positioning for the future. If one was to have a complaint, it would be that the bank was already on top of its game years ago, making it difficult for the firm to further optimize efficiency and returns, while peers seem to be gradually “catching up” over time. U.S. Bancorp has an attractive mix of fee-generating businesses, including payments, corporate trust, investment management, and mortgage banking. The payments and trust businesses tend to be highly efficient and scalable due to relatively fixed cost structures. Barriers to entry tend to be high as the initial investment and scale necessary to compete are prohibitive, although competition within payments has heated up in the last several years as software and technology offerings are increasingly important. 

The USB has generally made the necessary investments in technology, leading to more integrated back-end systems, a competitive payments platform, and a leading presence in the push toward omnichannel banking. The continued secular trend of the increasing digitization of payments should provide further growth opportunities, and the importance of scale and technology should favor the largest banks, including U.S. Bancorp, over time. Payment’s volumes are coming back for the bank as its merchant acquiring and commercial payments businesses are set to turn a corner in 2022 as economic activity improves. The upcoming acquisition of Union Bank favorably and I think the cost savings alone should add some value for shareholders. U.S. Bancorp has one of the best deposit market share concentrations under the coverage, which strengthens the efficiency and profitability of its traditional banking segments. Managers in the bank are also required to have 5% cost-cutting plans ready at any time if needed.

Financial Strengths

The U.S. Bancorp is in good financial health. The bank weathered the 2016 energy downturn well, and energy loans currently make up only 1% of the loan book. The bank also performed admirably through the pandemic driven downturn. Most measures of credit strain remain quite manageable, and the bank’s history of prudent lending–and the fact that the makeup of its loan book has not changed that much over time–gives us comfort with the risks here. One does not have significant concerns about capital. U.S. Bancorp had a common equity Tier 1 ratio of 9.7% as of June 2022. This is well within a reasonable range. The capital-allocation plan remains standard for the bank, with roughly 40% of earnings devoted to dividends, internal investments prioritized, and then the remainder devoted to buybacks.

Bulls Say

  • Strong fee revenue in moaty businesses, such as payments, helps insulate U.S. Bancorp from a flatter yield curve environment and drive higher returns on equity. 
  • The bank’s upcoming acquisition of MUFG Union Bank should provide additional revenue growth, expense synergies, and value for shareholders. 
  • As payments-related balances and fees come back in 2022, it should provide another earnings growth lever for U.S. Bancorp.

Company Description

As a diversified financial-services provider, U.S. Bancorp is one of the nation’s largest regional banks, with branches in well over 20 states, primarily in the Western and Midwestern United States. The bank offers many services, including retail banking, commercial banking, trust and wealth services, credit cards, mortgages, and other payments capabilities.

(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

Enthusiasm for Rogers’ Stellar Q2 Dampened by Yet Another Side Issue—July’s Network Outage

Business Strategy & Outlook

Rogers has alleviated the concern one has long had that its wireless network is falling behind rivals Telus and BCE and that BCE’s fiber-to-the-home build-out would dent Rogers’ cable dominance. It has invested to improve its wireless network, and it has skirted Shaw’s fate of cable customer losses in the face of its competitor’s network improvement, mitigating market share losses. Its proposed acquisition of Shaw will be value neutral, but the purchase price and integration uncertainty bring greater risk. Rogers is investing heavily in its wireless network. It was the biggest spender in 2019’s 600-megahertz spectrum auction and 2021’s 3500-megahertz spectrum auction. The firm is also rolling out its 5G network, which one doesn’t expect to be consequential in the near term but should ensure that Rogers doesn’t lag competitors. 

While Rogers’ network has clearly been behind Telus and BCE in network speed ratings, one doesn’t think it has a practical effect on service customers receive. Nonetheless, Rogers to close the gap as it rolls out its newly acquired spectrum and transitions to a 5G network. The enhanced network in conjunction with the industry consolidation will result in churn declining, pricing power increasing, and margins expanding. Rogers will face tougher cable competition, but with BCE’s network revamp more than 50% complete, Rogers has been holding its own. Rogers has averaged better than 4% annual broadband subscriber growth since 2016. TV and phone subscribers continue to decline, which will continue, but phone service will make up only 6% of cable revenue in 2019, and the smaller TV subscriber base will be somewhat offset by the premium Ignite TV offering. The Rogers’ media unit, or at least parts of it, has more value in a sale than it does as an operating business. According to Forbes magazine estimates, the Blue Jays are worth USD 1.8 billion, but the team generates no operating profit. The move away from linear TV viewership and the shift to digital media content has impaired print publication and television and radio station holdings.

Financial Strengths

Rogers’ leverage has been significantly higher than usual in recent years, as the firm has been upgrading its networks, participating in spectrum auctions, and deploying capital to enhance its television offerings. The leverage will remain somewhat elevated in coming years as the firm’s elevated network spending continues. However, one doesn’t foresee any difficulty in Rogers’ ability to meet its obligations as the economy turns down. Though Rogers targets a net debt to EBITDA ratio under 2.5, it was 3.2 as of June 30, 2022 (excluding debt the firm has taken on and reserved for the Shaw purchase), and to remain above 3.0 through 2023, as spectrum auctions and the Shaw merger will keep debt levels heightened. However, interest coverage remains strong, with an adjusted EBITDA to interest expense ratio of nearly 7.0 at the end of 2021. The current dividend is well covered, with free cash flow still covering the dividend by nearly two times. One doesn’t think the dividend is ironclad in a prolonged period of weakness, but the firm did not cut it amid the COVID-19 outbreak, and one doesn’t anticipate it will even need to consider it unless a major recession coincides with the near-term merger and spectrum obligations. However, one doesn’t expect regular dividend increases while leverage is elevated and spectrum outlays continue.

Bulls Say

  • With the Canadian wireless market less penetration than the U.S. and Europe and the country receptive to immigrants and foreign workers, wireless subscriber growth should remain high. As the industry leader, Rogers is well positioned. 
  • Rogers’ media unit is worth far more than the market is giving it credit for. If that continues, Rogers can sell some assets to create significant value. 
  • A gradual return of roaming traffic gives a long runway for heightened wireless average revenue per customer growth.

Company Description

Rogers is the largest wireless service provider in Canada, with its more than 10 million subscribers equating to one third of the total Canadian market. Rogers’ wireless business accounted for 60% of the company’s total sales in 2021 and has increasingly provided a bigger portion of total company sales over the last several years. Rogers’ cable segment, which provides about one fourth of total sales, offers home Internet, television, and landline phone service to consumers and businesses. Remaining sales come from Rogers’ media unit, which owns and operates various television and radio stations and the Toronto Blue Jays. Rogers’ significant exposure to sports also includes ownership stakes in the Toronto Maple Leafs, Raptors, FC, and Argonauts.

(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

Mercedes-Benz Is a World Leader in Premium and Luxury Automobiles

Business Strategy & Outlook

Daimler AG completed the spinoff of its truck and bus operations on Dec. 10, 2021 and changed its name to Mercedes-Benz Group AG on Feb. 1, 2022. In 2021, the truck and bus business, now called Daimler Truck AG, accounted for 20% of consolidated revenue including discontinued operations and 11% of group adjusted EBIT. The remaining operations of Mercedes-Benz Group include premium and luxury passenger vehicles and light commercial vans as well as Mercedes-Benz Mobility, which includes financial services and other mobility services like ride-hailing. The highly regarded Mercedes-Benz brand is one of the top luxury automobile names in the world. The firm is also a European leader in commercial vans. Even so, Mercedes faces stiff competition in all of its markets. The company operates in the cyclical, capital-intense, highly competitive passenger vehicle industry where raw material commodity costs can be volatile and unionized labor can be expensive. 

Geographically diverse sales reduce exposure to the economic conditions of any one region. Even so, premium brands such as Mercedes-Benz limit exposure to downturns suffered by mass-market auto companies because wealthier customers’ spending is less sensitive to recessions. Global population growth of high-net-worth individuals has averaged 5%, increasing Mercedes’ addressable market, faster than the 1%-3% rate for long-term global light-vehicle demand growth. New products are critical to spurring consumer interest and can help results even in an economic downturn. Mercedes-Benz launches new or significantly refreshed models in various markets around the world every year. Research and development spending, including capitalized development costs, is substantial, averaging roughly 6% of sales, which is a necessary part of a long-term strategy. Environmental legislation worldwide forces automakers to design vehicles with more efficient combustion engines and electrified powertrains. By 2030, the company says it will be “ready to go all-electric.”

Financial Strengths

One can consider Mercedes-Benz’ balance sheet to be in good shape. The company maintains a substantial cash balance and healthy availability on bank lines of credit. To remain competitive, automakers need high liquidity to fund R&D and capital investment to support product launches throughout economic cycles. At the end of 2021, the company had net industrial liquidity of EUR 21.0 billion (cash and credit line availability less debt). The company has healthy liquidity. The industrial business’ total adjusted debt/EBITDAR, which takes into consideration rent expense and operating leases, has averaged 0.7 times since 2011, which is strong for a capital-intensive, cyclical passenger vehicle maker. Financial liability maturities, including financial services, appear to be well laddered and matched with maturing financial loan assets. Mercedes’ consolidated capital structure is complex from its captive finance operations, which support industrial operations’ sales by providing credit to dealers and consumers but also have banking operations and other financial services. Aside from its balance sheet cash hoard, the company relies mostly on notes and bonds for its funding requirements but also uses lines of credit, deposits from banking customers, and commercial paper. The consolidated capital structure’s total debt/total capital historical average since 2011 is 63.0%. Taking Mercedes’ substantial cash position into account, net debt/total capital averages 51.6%. With the financial-services business accounted for on an equity basis, Mercedes’ total debt/total capital averages 13.8%, while net debt/total capital averages only negative 11.5%, denoting an average net cash position.

Bulls Say

  • Mercedes-Benz is a highly recognizable, well respected global luxury brand, giving the company a modest buffer against the cyclical downturns of auto sales. 
  • Mercedes’ strong R&D capabilities and electrified powertrain technologies should prove valuable because of global clean-air legislation. 
  • Management’s long-term return on sales targets are higher than what is model, so upside potential exists to the valuation.

Company Description

Based in Stuttgart, Germany, Mercedes-Benz Group AG makes premium passenger vehicles and commercial vans. Brands include Mercedes-Benz, AMG, and Maybach. Mercedes-Benz Mobility provides the company’s dealers and its customers with vehicle financing as well as mobility services in ride hailing, car sharing, and charging. Mercedes owns 11.9% of Aston Martin and 9.6% of Beijing Automotive Group. Li Shufu, chairman of Chinese automaker Geely Automobile, owns 9.7% of Mercedes-Benz. Other major shareholders include Kuwait Investment Authority at 6.8% and Beijing Automotive group at 5.0%.

(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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U.S. Bancorp has an attractive mix of fee-generating businesses, including payments, corporate trust, investment management, and mortgage banking

Business Strategy and Outlook 

U.S. Bancorp is one of the strongest and best-run regional banks. Few domestic competitors can match its operating efficiency, and for the past 15 years the bank has consistently posted returns on equity well above peers and its own cost of equity. U.S. Bancorp’s exposure to moaty nonbank businesses and its consistently excellent core banking operations make us like the company’s positioning for the future. It would be that the bank was already on top of its game years ago, making it difficult for the firm to further optimize efficiency and returns, while peers seem to be gradually “catching up” over time. U.S. Bancorp has an attractive mix of fee-generating businesses, including payments, corporate trust, investment management, and mortgage banking. The payments and trust businesses tend to be highly efficient and scalable due to relatively fixed cost structures. Barriers to entry tend to be high as the initial investment and scale necessary to compete are prohibitive, although competition within payments has heated up in the last several years as software and technology offerings are increasingly important.

USB has generally made the necessary investments in technology, leading to more integrated back-end systems, a competitive payments platform, and a leading presence in the push toward omnichannel banking. The continued secular trend of the increasing digitization of payments should provide further growth opportunities, and the importance of scale and technology should favour the largest banks, including U.S. Bancorp, over time. Payments volumes are coming back for the bank as its merchant acquiring and commercial payments businesses are set to turn a corner in 2022 as economic activity improves. The upcoming acquisition of Union Bank favourably and think the cost savings alone should add some value for shareholders. U.S. Bancorp has one of the best deposit market share concentrations under the coverage, which strengthens the efficiency and profitability of its traditional banking segments. Managers in the bank are also required to have 5% cost-cutting plans ready at any time if needed.

Financial Strength

U.S. Bancorp is in good financial health. The bank weathered the 2016 energy downturn well, and energy loans currently make up only 1% of the loan book. The bank also performed admirably through the pandemic driven downturn. Most measures of credit strain remain quite manageable, and the bank’s history of prudent lending–and the fact that the makeup of its loan book has not changed that much over time–gives us comfort with the risks here. There are no significant concerns about capital. U.S. Bancorp had a common equity Tier 1 ratio of 9.7% as of June 2022. This is well within a reasonable range. The capital-allocation plan remains standard for the bank, with roughly 40% of earnings devoted to dividends, internal investments prioritized, and then the remainder devoted to buybacks.

Bulls Say’s

  • Strong fee revenue in moaty businesses, such as payments, helps insulate U.S. Bancorp from a flatter yield curve environment and drive higher returns on equity. 
  • The bank’s upcoming acquisition of MUFG Union Bank should provide additional revenue growth, expense synergies, and value for shareholders. 
  • As payments-related balances and fees come back in 2022, it should provide another earnings growth lever for U.S. Bancorp.

Company Profile 

As a diversified financial-services provider, U.S. Bancorp is one of the nation’s largest regional banks, with branches in well over 20 states, primarily in the Western and Midwestern United States. The bank offers many services, including retail banking, commercial banking, trust and wealth services, credit cards, mortgages, and other payments capabilities.

 (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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Dividend Stocks

Reckitts pricing muscle will also be its strongest test in the current highly inflationary environment

Business Strategy and Outlook 

Reckitt’s portfolio is well positioned in categories that benefit from secular growth drivers across consumer health and hygiene, which should translate into growth ahead of its peer group in the midterm. The acquisition of Mead Johnson has added to its portfolio a leadership position in infant nutrition–a segment with pricing power and generally sound margins. However, the timing of the transaction, ahead of a period of declining birth rates and intensified competition in China, posed significant challenges and has dampened revenue growth in the last few years. Management sold the infant nutrition business in China in 2021, and the future of the remaining core infant nutrition business remains uncertain. While the segment’s, reduced size presents an opportunity for management to refocus on faster-growing businesses–positioning them for longer-term success past the peaks in demand generated by the coronavirus pandemic–further secular declines in birth rates in the U.S. could continue to be a drag to the company’s mid-single-digit growth ambitions. Nonetheless, the worst is behind the company. Reckitt’s pricing muscle will also be its strongest test in the current highly inflationary environment. Its cautious about price decisions that are too aggressive and could impact the consumption of some of its products, but believe the company is well positioned to deliver superior price/mix through its portfolio of strong brands and its advantaged category mix.

Further supporting top-line growth, the productivity program started in 2020 that now stands at GBP 2 billion over four years has enabled management to reinvest around GBP 1 billion so far in key areas such as research and development, or R&D, and e-commerce. These investments were necessary as Reckitt was at risk of falling behind peers in its customer acquisition investments. No large portfolio can be seen restructuring as part of its strategy in the near term. Reckitt is to continue to make marginal portfolio adjustments, acquiring fast-growing brands that complement its existing portfolio, especially in the consumer health sector.

Financial Strength

Prior to the Mead Johnson acquisition in 2017, Reckitt had a strong balance sheet with debt/EBITDA of around 1 time. It significantly increased its leverage to finance the $18 billion Mead Johnson acquisition, which lead to a peak net debt/EBITDA of 6 times in 2017. Since then, it has been diligent in reducing its leverage and closed 2021 with net debt/EBITDA of 2.6 times, a slight increase compared with the 2020 level of 2.4 times, but closer in line with its peer group. From a cash perspective, this level of debt is manageable for the company given EBITDA covered interest expense about 12 times in 2021. In future, it can see continued debt reduction, which should enable Reckitt to start increasing dividends again or pursue slightly larger bolt-on acquisitions in the medium term. Dividends have amounted to GBP 1.2 billion per year for the last three years and no meaningful growth can be seen in the near term as Reckitt is targeting a dividend cover closer to 2 times before reinitiating dividend increases.

Bulls Say’s

  • Reckitt’s portfolio is well positioned in categories with long-term structural growth potential, and the turnaround initiated by new management in 2020 is progressing well. 
  • The disposal of the infant nutrition business in China will free up management’s focus and enable Reckitt to refocus its efforts on its faster-growing segments. 
  • The additional investment in the business financed by the GBP 2 billion productivity program should translate into accelerated growth through penetration gains and increased e-commerce contributions to net revenue.

Company Profile 

Reckitt Benckiser was formed in 1999 through the merger of the British firm Reckitt & Colman and Dutch-based Benckiser. Recently rebranded under the corporate name Reckitt, it sells a portfolio that includes a variety of household and consumer health brands, such as Lysol, Finish, Durex, and Mucinex, many of which hold the number-one or -two positions in their categories globally. Reckitt has repositioned its portfolio and has entered the infant formula market through the acquisition of Mead Johnson in 2017, expanded its consumer health presence by acquiring Schiff Nutrition, K-Y, and Biofreeze, and has exited the food industry. The firm operates in 60 countries and sells products in more than 200, generating around 35% of sales from emerging 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 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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Dividend Stocks

U.S. Baby Formula Crisis is a one-time boon for narrow-moat Reckitt; Shares Fairly Valued

Business Strategy & Outlook

Reckitt’s portfolio is well positioned in categories that benefit from secular growth drivers across consumer health and hygiene, which should translate into growth ahead of its peer group in the midterm. The acquisition of Mead Johnson has added to its portfolio a leadership position in infant nutrition–a segment with pricing power and generally sound margins. However, the timing of the transaction, ahead of a period of declining birth rates and intensified competition in China, posed significant challenges and has dampened revenue growth in the last few years. Management sold the infant nutrition business in China in 2021, and the future of the remaining core infant nutrition business remains uncertain. While the segment’s reduced size presents an opportunity for management to refocus on faster-growing businesses–positioning them for longer-term success past the peaks in demand generated by the coronavirus pandemic–further secular declines in birth rates in the U.S. could continue to be a drag to the company’s mid-single-digit growth ambitions. Nonetheless, the worst is behind the company. 

Reckitt’s pricing muscle will also be its strongest test in the current highly inflationary environment. One is cautious about price decisions that are too aggressive and could impact the consumption of some of its products, but believe the company is well positioned to deliver superior price/mix through its portfolio of strong brands and its advantaged category mix. Further supporting top-line growth, the productivity program started in 2020 that now stands at GBP 2 billion over four years has enabled management to reinvest around GBP 1 billion so far in key areas such as research and development, or R&D, and e-commerce. These investments were necessary as Reckitt was at risk of falling behind peers in its customer acquisition investments. One doesn’t see large portfolio restructuring as part of its strategy in the near term. The Reckitt to continue to make marginal portfolio adjustments, acquiring fast-growing brands that complement its existing portfolio, especially in the consumer health sector.

Financial Strengths

Prior to the Mead Johnson acquisition in 2017, Reckitt had a strong balance sheet with debt/EBITDA of around 1 time. It significantly increased its leverage to finance the $18 billion Mead Johnson acquisition, which lead to a peak net debt/EBITDA of 6 times in 2017. Since then, it has been diligent in reducing its leverage and closed 2021 with net debt/EBITDA of 2.6 times, a slight increase compared with the 2020 level of 2.4 times, but closer in line with its peer group. From a cash perspective, this level of debt is manageable for the company given EBITDA covered interest expense about 12 times in 2021. In future, to see continued debt reduction, which should enable Reckitt to start increasing dividends again or pursue slightly larger bolt-on acquisitions in the medium term. Dividends have amounted to GBP 1.2 billion per year for the last three years and one doesn’t expect to see meaningful growth in the near term as Reckitt is targeting a dividend cover closer to 2 times before reinitiating dividend increases.

Bulls Say

  • Reckitt’s portfolio is well positioned in categories with long-term structural growth potential, and the turnaround initiated by new management in 2020 is progressing well. 
  • The disposal of the infant nutrition business in China will free up management’s focus and enable Reckitt to refocus its efforts on its faster-growing segments. 
  • The additional investment in the business financed by the GBP 2 billion productivity program should translate into accelerated growth through penetration gains and increased e-commerce contributions to net revenue.

Company Description

Reckitt Benckiser was formed in 1999 through the merger of the British firm Reckitt & Colman and Dutch-based Benckiser. Recently rebranded under the corporate name Reckitt, it sells a portfolio that includes a variety of household and consumer health brands, such as Lysol, Finish, Durex, and Mucinex, many of which hold the number-one or -two positions in their categories globally. Reckitt has repositioned its portfolio and has entered the infant formula market through the acquisition of Mead Johnson in 2017, expanded its consumer health presence by acquiring Schiff Nutrition, K-Y, and Biofreeze, and has exited the food industry. The firm operates in 60 countries and sells products in more than 200, generating around 35% of sales from emerging markets.

(Source: Morningstar)

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