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Dividend Stocks

Swiss Re has a history of overly aggressive expansion and typically too much leverage

Business Strategy & Outlook

Swiss Re has a history of overly aggressive expansion and typically too much leverage. The first example of this can be seen in the acquisition of General Electric Insurance Solutions in the earlier part of the new millennium. This was financed through a combination of debt and share issuance, a historic and largest Swiss Re acquisition in that period. Furthermore, Swiss Re continued down a path of building out its reinsurance securitization offering, structuring pools of credit, mortality and natural catastrophe risk. This did not work out well because the Swiss Re increased correlation and dependence and when financial markets fell so did the value of these securities. Swiss Re’s leverage position and problems with its securitization program led the business to complete a capital raise and take on Berkshire as a preferential terms investor.

This investment built on a previously established relationship where Berkshire reinsured substantially all of Swiss Re’s yearly renewable-term United States mortality book, another area where Swiss Re had run into difficulties. The latest round has been aggressive expansion for commercial insurance and this came back to bite the business. What one can see now is a business that is still overleveraged and one where the levels of debt do need to be addressed. However, from an operational perspective one can see a company that is focusing on building a cleaner and more traditional reinsurance business, one that focuses on underwriting and shifts away from reliance on investment returns to fund unprofitable long-tailed lines of underwriting. A turnaround in corporate solutions starting to come to fruition and the nascent stronger move into more specialist lines of business and find the management team to be a lot more disciplined. However, one would like to see the business reign in its buybacks and concentrate more on building out the long-term profitability of this business.

Financial Strengths

Swiss Re does not have a particularly strong balance sheet. It would help the business immensely if management chose to pay down more debt. Swiss Re has around $11.2 billion of debt. The majority of this is long term, and the most substantial portions don’t mature for a few years. The shape of the debt isn’t well balanced, with the vast majority issued as subordinated. This means there are some pockets of very high interest rates and this is reflected in the broader group’s interest. Swiss Re pays an annual dividend that it intends to grow annually in line with long-term earnings growth and maintain the prior year’s dividend as a minimum level. The business also actions buybacks, though given the macro uncertainty it would be prudent if the business held off over the next few years from doing this.

Bulls Say

  • Swiss Re looks to be on the cusp of producing consistent results in the long term under the performing commercial insurance division. 
  • One can believe the quality of Swiss Re’s investment portfolio is high. 
  • Swiss Re pays a good dividend.

Company Description

Swiss Re was established in 1863 in Zurich. Since then, the business appears to have cycled through quite a few strategies. Namely in the early part of the millennium Swiss Re took on an investment banker who eventually led the business. Over the next 10 years CEO Jacques Aigrain built Swiss Re’s financial solutions into a powerhouse and helped the company complete its first securitization, finalized in 2005 for credit reinsurance. This division became a leader for Swiss Re but then disaster struck during the global financial crisis. Swiss Re mothballed this unit and approved a CHF 5 billion capital raise. Now the business concentrates more fundamentally on property and casualty, life and health reinsurance. Swiss Re also has a good commercial insurance offering named corporate solutions.

(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

SL Green Reported Lackluster Results in Q2; Reducing FVE to $64 Per Share

Business Strategy & Outlook

SL Green Realty is a real estate investment trust engaged in the acquisition, development, repositioning, ownership, and management of commercial real estate properties, principally office properties. Most of the companies’ properties are in the Manhattan area. The company held interests in approximately 35 million SF, which includes ownership interests in 26.7 million SF in Manhattan buildings and 7.2 million SF securing debt and preferred equity investments. The strategy of the company is to maintain a high-quality portfolio of buildings in desirable locations and focus on creating value through new developments, capital recycling, and joint venture investments. As an instance, SL Green’s $3 billion megaproject One Vanderbilt was completed amidst the pandemic and has already achieved high occupancy rates. The economic uncertainty emanating from pandemic recovery and the remote work dynamic have created a challenging environment for office owners. 

Employees are still hesitant in returning to the office as office utilization remains around 45% of the pre-pandemic level. The vacancy rate for office spaces in Manhattan was recorded at 21% in first-quarter 2022, which is roughly 1000 basis points higher than pre-pandemic levels. On the supply side, approximately 17 million SF of office space, which amounts to around 4% of the total inventory, is currently under construction in Manhattan and would be added to the market in upcoming years. This additional supply to further pressure fundamentals in the market. The Manhattan net absorption rate remains negative as of first-quarter 2022 and rental growth figures are disappointing especially given the highly inflationary environment. Having said this, an increasing number of companies require their employees to return to the office. In the long run, one can believe that remote work and hybrid remote work solutions will gain increasing acceptance, but offices will continue to be the centerpiece of workplace strategy and will play an essential role in facilitating collaboration, harnessing innovation, and maintaining the company culture.

Financial Strengths

SL Green has relatively more debt compared with other office REITs especially after considering its share of debt in unconsolidated joint ventures. The firm owns a majority of its properties through unconsolidated JVs and these properties are significantly more leveraged than the firm’s balance sheet. However, the unconsolidated JV debt is secured by the portfolio assets and has limited recourse to the parent company. The company’s share of debt which also includes its share of unconsolidated JV debt was $9.9 billion as of the end of first-quarter 2022, resulting in a debt/EBITDA ratio of 13.1 times. The current debt/EBITDA ratio is also high because of a lower base in the current challenging environment. The figure should come down slightly over the next few years as fundamentals recover and EBITDA sees healthy growth. Having said this, SL Green’s higher leverage implies a higher financial risk for the firm. The weighted average interest rate on the company’s debt was 3.11% and the debt maturity schedule shows that the maturities are adequately spread. Approximately 77% of the total debt is fixed-rate debt with the other 23% being floating rate debt. The debt service coverage ratio which is a ratio of EBITDA divided by interest and principal payments was 2.2 times as of the end of first-quarter 2022. The fixed-charge coverage ratio, which is a ratio of EBITDA divided by all fixed expenses (including interest) was 1.9 times as of the end of first-quarter 2022. The debt and fixed-charge coverage ratios are 3.8 times and 2.9 times, respectively, if one can consider only consolidated figures. As a REIT, SL Green is required to pay out at least 90% of its income as dividends to shareholders. The FAD payout ratio which is a ratio of dividends to funds available for distribution was reported at 70% for the year 2021. This shows the firm is generating sufficient cash to cover its fixed expenses and payout dividend.

Bulls Say

  • SL Green’s midtown focus allows it to access one of the most vibrant business districts in the world. In addition to this, the company’s high-quality office buildings with good amenities should benefit from the flight to quality trend. 
  • The development pipeline of the company is poised to drive significant net operating income growth for SL Green 
  • SL Green attracts the highest-quality tenants with the deepest pockets, greatly reducing risk across its portfolio.

Company Description

SL Green is one of the largest Manhattan property owners and landlords, with interest in around 35 million square feet of wholly owned and joint venture office space. The company has additional property exposure through its limited portfolio of well-located retail space. It operates as a real estate investment trust.

(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

Ageas is lacking clear direction and a proven strategy

Business Strategy and Outlook 

Ageas is lacking clear direction and a proven strategy. Ageas is present in Belgium, U.K., continental Europe, and Asia as well as running its own reinsurance operation. Tack on to that the importance of the business’ asset management, you are essentially left with a business that has six divisions. Insurance is a complex set of products and the historical approach has been one of diversification. However, it can be seen within primary insurers and in particular multilines, with increasing diversification these businesses can lack specific expertise and master none. This approach to diversification is highly important in the reinsurance business. With exposure to large and lumpy losses these businesses will want to ensure that during those times they have more steady and reliable sources of income. But for primary insurers much of this tail risk is indemnified and this leaves managerial attention a crucial input for shareholder outcomes. It can be found within this and in particular in smaller multilines, is this diversification leads to a dilution of expertise and thus reduces firms’ dominance in their chosen fields.

This strategy of greater diversification unwinds. For example, Prudential has been separated into three distinct geographical businesses that focus purely on life insurance products that are most relevant in each of these locales. Given the strength of the management team and dominance of the respective primary product in each of these regions, in the long term this strategy will not be one that prevails. Aegon is a company that has long-lost the investment community on its strategic direction and rationale. This business is now focusing on just three markets and has also started to trim its portfolio to one that focusses on the accumulation side. Aviva is another business that suffered from the diversification cloud. However, it is now only focusing on three end-markets with force; this has been well received via shareholder distributions. Ageas is to take a similar stand.

Financial Strength

Ageas has quite a high amount of debt on its balance sheet relative to the amount of capital that shareholders own. While the interest Ageas pays on this debt is quite low, the fluctuation of the value in the RNPI and the high value of associates means the quality of Ageas’ balance sheet isn’t high. Furthermore, cash seems to be a little low and Ageas management have discussed either a buyback or eyeing more mergers and acquisitions. Buybacks unless the business is looking to buy into more of its existing partnerships within its Asian operations. Ageas runs its own reinsurance division is not likeable. This is only for its nonlife sales and the rationale provided by management is this diversification frees up capital for investment and distributions to shareholders. Ageas doesn’t have deep expertise here, and while the lines in nonlife that it underwrites are standard, it would be much more sensible to leave this to the experts and focus on what it knows. This would provide more comfort in anticipation of an extreme event, so that Ageas’ balance sheet was fully equipped to handle it. The majority of Ageas’ financial investments are held in government debt. However, there is around EUR 4.1 billion in available for-sale unrealised gains. Then there are the nearly EUR 13.4 billion in loans, a little over EUR 10.8 billion is unsecured. It doesn’t appear to be a particularly tidy, secure or strong balance sheet.

Bulls Say’s

  • It can be sensed that operationally this is not such a bad business. However, with the scant disclosures on operations there’s a little way of knowing. 
  • In Asia Ageas seems to go from strength to strength. Now it is investing more here though, it is hesitant on Chinese reinsurance allocation. 
  • By and large a decent looking fixed-income portfolio. However, it is less keen on the level of unsecured loans.

Company Profile 

Ageas is a life and nonlife insurance company that derives most of its income from life and savings, mostly from Belgium and is headquartered in Brussels. Ageas is essentially the result of the failed bid for ABN Amro by Banco Santander; Fortis; Royal Bank of Scotland. The capital requirements placed on these banks as a result of the acquisition combined with severe write-downs on its collateralised debt obligations in the case of Fortis left the business requiring capital. Understandably, a less successful capital raising that took place the GLOBAL financial crisis wasn’t enough and the bank, Fortis, had to be sold and nationalised. What remained was Fortis Insurance, which in 2010 was renamed to Ageas.

 (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

Market Selloff Continues to Affect Invesco’s Flows and AUM Levels; No Change to $20 Per Share FVE

Business Strategy & Outlook

A confluence of several issues–poor relative active investment performance, the growth and acceptance of low-cost index-based products, and the expanding power of the retail-advised channel–has made it increasingly difficult for active asset managers to generate organic growth, leaving them more dependent on market gains to increase their assets under management. While there will always be room for active management, the advantage for getting and maintaining placement on platforms will go to managers that have greater scale, established brands, solid long-term performance, and reasonable fees. With $955 billion in managed assets before the Oppenheimer Funds acquisition, Invesco already had the size and scale to be competitive, but that deal has raised the firm to a different level, with the company holding $1.390 trillion in assets under management at the end of June 2022, making it the 13th-largest global asset manager and the seventh-largest in the U.S. retail channel. That said, size is not always a guarantor of organic growth (which is a function of performance and fees) and above-average profitability, as demonstrated by Invesco’s historical shortcomings.

During 2012-21, the firm’s organic growth rate averaged 0.9% annually with a standard deviation of 3.7%, leaving it on much better footing than most of its equity-heavy active management peers. Having seemingly put its merger-related outflows (which added to depressed organic growth during 2018-20) behind it, Invesco has now generated seven straight quarters of positive long-term flows as of the end of March 2022. The firm’s adjusted GAAP operating margins, which rose to 24%-26% following contributions from merger synergies from the Oppenheimer Funds deal and cost-cutting efforts, to deteriorate in the near term in the face of fee compression and rising costs (necessary to improve investment performance and enhance product distribution), even when considering the company’s product and channel mix as well as its recent return to positive organic growth.

Financial Strengths

Invesco entered 2022 with $2.1 billion of debt on its books, composed of $600 million of 3.125% notes due November 2022, $600 million of 4.000% notes due January 2024, $500 million of 3.75% notes due January 2026, and $400 million of 5.375% notes due November 2043. The company also has a $1.25 billion floating-rate credit facility (maturing in April 2026) at its disposal. Should the firm close out the year in line with the expectations, and roll over its debt due later this year, it would enter 2023 with a debt/total capital ratio of 11%, a debt/EBITDA ratio of 1.4 times, and an EBITDA interest coverage ratio of 16.3 times. While Invesco has traditionally dedicated much of its excess cash to seed investments, dividends, and share repurchases, the issuance of $4.0 billion of 5.9% perpetual noncumulative preferred stock as part of its financing of the 2018-19 Oppenheimer Funds acquisition is eating up cash, as the firm pays out $236 million annually to service the interest obligation. The size and scope of the Oppenheimer Funds deal means that future deals are likely to be smaller, bolt-on acquisitions aimed at plugging holes in the firm’s product mix and/or geographic reach. One had not expected the company to cut the quarterly dividend by 50% to $0.155 per share at the start of the second quarter of 2020, but given the challenges presented by the COVID-19 pandemic, as well as the commitment to the preferred dividend, it was not too surprising. The firm did, however, raise the quarterly dividend 10% to $0.17 per share during 2021 and lifted it by another 10% in early 2022 to $0.1875 per share. Even so, one cannot expect the dividend to return to pre-pandemic levels for some time, with the firm likely to maintain a payout ratio of 30%-35% longer term. One does not expect much in the way of share repurchases in the near term unless the shares are trading at a significant discount to intrinsic value.

Bulls Say

  • The Oppenheimer Funds deal lifted AUM closer to the $1.5 trillion mark, putting Invesco on a slightly better footing with industry giants like BlackRock and Vanguard, each of which oversees more than $5 trillion. 
  • Invesco’s organic AUM growth has turned positive, with the firm picking up an average of $12.8 billion in net inflows quarterly over the past eight calendar quarters compared with negative $11.9 billion the previous eight quarters. 
  • Oppenheimer Funds’ slightly higher AUM realization rate should help offset some of the impact of industry wide fee compression on Invesco’s top line.

Company Description

Invesco provides investment-management services to retail (67% of managed assets) and institutional (33%) clients. At the end of June 2022, the firm had $1.390 trillion in assets under management spread among its equity (47% of AUM), balanced (5%), fixed-income (22%), alternative investment (14%), and money market (12%) operations. Passive products account for 31% of Invesco’s total AUM, including 55% of the company’s equity operations and 12% of its fixed-income platform. Invesco’s U.S. retail business is one of the 10 largest nonproprietary fund complexes in the country. The firm also has a meaningful presence outside the U.S., with close to one third of its AUM sourced from Canada (2%), the U.K. (3%), continental Europe (11%), and Asia (15%).

(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

Cummins will continue to be the top supplier of truck engines and components, despite increasing emissions regulation

Business Strategy & Outlook

The Cummins will continue to be the top supplier of truck engines and components, despite increasing emissions regulation from government authorities. For over a century, the company has been the pre-eminent manufacturer of diesel engines, which has led to its place as one of the best heavy- and medium-duty engine brands. Cummins’ strong brand is underpinned by its high-performing and extremely durable engines. Customers also value Cummins’ ability to enhance the value of their trucks, leading to product differentiation. The company’s strategy focuses on delivering a comprehensive solution for original equipment manufacturers. The Cummins will continue to gain market share, as it captures a larger share of vehicle content. This is largely due to increasing emissions regulation, which allows Cummins to sell more of its emissions solutions, namely its aftertreatment systems that convert pollutants into harmless emissions. 

Additionally, Cummins stands to benefit from the electrification of powertrains in the industry. The company has made progress in the school and transit bus markets. Long term, the truck market will also increase electrification. The pressure to manufacture more environmentally friendly products is forcing truck OEMs to evaluate whether it’s economically viable to continue producing their own engines and components or to partner with a market leader like Cummins. One has this play out recently, through the increase in partnership announcements for medium-duty engines with truck OEMs. Some OEMs will opt to shift investment away from engine and component development, leaving it to Cummins. Cummins has exposure to end markets that have attractive tailwinds. In trucking, the new truck orders will be strong in the near term, largely due to strong demand for consumer goods. In good times, truck operators replace aging trucks and opt to expand their fleet to meet strong demand. Longer term, Cummins will continue to invest in BEVs and fuel cells to power future truck models. We believe a zero-emission world is inevitable, but the Cummins can use returns from its diesel business to drive investments.

Financial Strengths

Cummins maintains a sound balance sheet. In 2021, total outstanding debt stood at $3.6 billion, but the firm had $2.6 billion of cash on the balance sheet. In 2020, the company issued $2 billion of long-term debt at attractively low rates, some of which was used to pay down its commercial paper obligations. Cummins’ strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and returns cash to shareholders. In terms of liquidity, the company can meet its near-term debt obligations given its strong cash balance. One can find comfort in Cummins’ ability to tap into available lines of credit to meet any short-term needs. Cummins has access to $3.2 billion in credit facilities. Cummins can also generate solid free cash flow throughout the economic cycle. The company can generate over $2 billion in free cash flow in mid cycle year, supporting its ability to return nearly all of its free cash flow to shareholders through dividends and share repurchases. Additionally, the management is determined to improve its distribution business following its transformation efforts in recent years. The Cummins can improve the profitability of the business through efficiency gains, pushing EBITDA margins higher in the near term. These actions further support its ability to return cash to shareholders. Cummins enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects of 2022.

Bulls Say

  • Strong freight demand in the truck market should lead to more new truck orders, substantially boosting Cummins’ revenue growth. 
  • Cummins will benefit from increasing emission regulation, pushing customers to buy emissions solutions, such as aftertreatment systems that turn engine pollutants into harmless emissions. 
  • Increasing emission standards could push peers to rethink whether it’s economically viable to continue manufacturing engines and components, benefiting Cummins.

Company Description

Cummins is the top manufacturer of diesel engines used in commercial trucks, off-highway equipment, and railroad locomotives, in addition to standby and prime power generators. The company also sells powertrain components, which include filtration products, transmissions, turbochargers, aftertreatment systems, and fuel systems. Cummins is in the unique position of competing with its primary customers, heavy-duty truck manufacturers, who make and aggressively market their own engines. Despite robust competition across all its segments and increasing government regulation of diesel emissions, Cummins has maintained its leadership position in the industry.

(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

Capital One will need to compete aggressively with other credit card issuers to rebuild its credit card portfolio

Business Strategy and Outlook 

Capital One maintains a more limited branch network than its traditional banking peers, using its online and mobile channels to acquire customers and service its accounts. The focus on online bank accounts has allowed the company to establish a national presence broader than what its narrow branch network would traditionally allow. This dynamic allows Capital One to enjoy the benefits of being a large bank without the expense of operating the branch system of a large bank. Capital One specializes in credit cards, with this segment making up more than 40% of its total loans. The bank’s remaining business mostly consists of commercial loans and auto loans through its consumer banking segment. The bank’s narrow product offering focuses its assets, giving Capital One the benefit of scale in its chosen business lines. This does have the consequence of leaving the bank undiversified as it is reliant on its credit cards and auto lending business.

Despite recent growth, Capital One’s credit card receivables are still below their 2019 highs after high payback rates during 2020-21 led to portfolio erosion. Capital One will need to compete aggressively with other credit card issuers to rebuild its credit card portfolio. Capital One has increasingly turned to the private label and co-branded credit card market to boost growth, winning the BJ’s Wholesale Club and Walmart portfolios from rival firms. While the extra growth can be seen, private label cards typically require revenue sharing agreements with the partnered merchants, reducing returns. On the other hand, high credit card paydown rates have benefited Capital One’s credit costs, with the company seeing net charge-off rates in 2022 well below the bank’s historical average, despite increased economic strain on consumers. Higher net charge-offs are expected for Capital One by 2023, 2022 should be another year of below average credit costs as the bank’s delinquency rates remain low across all loan types. Even should credit costs rise, Capital One remains in a healthy financial position, and there are no material financial strains being placed on the bank’s balance sheet.

Financial Strength

Despite its credit exposure to credit cards and auto loans, Capital One is in a strong financial position. While rising deposits and falling credit card receivables have hurt the bank’s net interest margin, the shift in the asset mix has benefited the balance sheet. At the end of March 2022, Capital One had a common equity Tier 1 ratio of 12.7%, down from its peak but still well above its long-term goal of 11%. Despite heavy reserve releases, Capital One is still well provisioned for future credit losses with its allowance for bad loans at 4.03% of existing receivables. These figures do need to be viewed in the context of Capital One’s exposure to subprime credit cards and subprime auto loans. Roughly one third of the bank’s domestic credit card portfolio is with card holders whose FICO scores were below 660, and a similar portion of its auto loans is from borrowers with FICO scores below 620. That said, the 2022 Dodd-Frank stress test results saw Capital One’s common equity Tier 1 capital ratio only fall to 10.2% under the severely adverse scenario. This is despite a projected loss rate of 20.4% on the company’s credit card portfolio and a loss rate of 13.3% on all loans in the severely adverse scenario. While Capital One does have credit-exposed assets, it is more than adequately capitalized to withstand potential credit losses.

Bulls Say’s:

  • Capital One’s credit card portfolio has begun to grow again, providing a boost to the company’s net interest margins and revenue growth. 
  • Technology investments, the transition away from legacy data centers, and its reduction in the branch count should help the company reduce costs in the coming years. 
  • Rising interest rates should provide a tailwind for Capital One’s net interest income as margins expand.

Company Profile 

Capital One is a diversified financial service holding company headquartered in McLean, Virginia. Originally a spinoff of Signet Financial’s credit card division in 1994, the company is now primarily involved in credit card lending, auto loans, and commercial lending.

(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

Looking beyond the current plan, Ameren has its sight set on nearly $28 billion of additional investment opportunities

Business Strategy and Outlook 

Ameren is a regulated utility that operates in Illinois and Missouri, two historically challenging regulatory jurisdictions that are rapidly improving. With improving rate regulation come significant investment opportunities, supporting the company’s five-year $17.3 billion capital investment plan. Looking beyond the current plan, Ameren has its sights set on nearly $28 billion of additional investment opportunities for the following five years, providing a long runway of growth for the company. Management is to be applauded for attaining constructive utility legislation in Missouri. Its patient yet persistent years-long efforts resulted in increased investment opportunities across the territory, a stark change from the past. Numerous trackers are in place for fuel adjustments, pension, and tax positions. These mechanisms are attributes of a constructive regulatory environment. Recent legislation allows utilities to securitize the remaining liabilities associated with Ameren’s coal plants, potentially allowing earlier-than-planned coal plant retirements and faster renewable energy growth.

With an improved regulatory framework in Missouri, management is keeping its promise to invest in jurisdictions that support investment. Ameren is allocating nearly half of its investment plan to Missouri. Projects will focus on renewable energy, upgrading aging and underperforming assets, and employing smart grids and connected grid services. Regulation in Illinois is set to change. While performance-based ratemaking, in which allowed returns on equity are 580 basis points above the average 30-year U.S. Treasury yield, was constructive, the drop-in interest rates led to some of the lowest allowed returns among its peers. New legislation allows utilities to opt in for a four-year rate plan beginning in 2024. Under the multi year plan, utilities are able to true-up earned returns to their allowed returns and continue sales decoupling. Performance metrics, both incentives and penalties, are given in a range of 20-60 basis points. The new rate structure could produce higher allowed returns in Illinois.

Financial Strength

Ameren will invest $17.3 billion of capital between 2022 and 2026.It is expected the company to issue debt and equity in line with its current capital structure and refinance its debt as it comes due. Ameren increased the dividend 10% in 2021. Future dividend growth to be more in line with earnings growth. Ameren has tended to be at the lower end of its 55%-70% dividend payout target. Ameren’s current financial health is sound. The firm’s 58% debt/capitalization ratio is in line with its utility peers. Interest coverage is healthy at over 6.0 times, and current debt/EBITDA is over 5.0.

Bulls Say’s:

  • Ameren’s regulated utilities provide a stable source of earnings. The company’s large capital expenditure plan should drive above-average rate base and earnings growth for the next several years. 
  • Ameren’s regulatory relationships have improved significantly in Missouri.
  • Ameren’s management team has proved to be best in-class operators, having diligently worked to improve regulatory relationships and execute on substantial growth projects.

Company Profile 

Ameren owns rate-regulated generation, transmission, and distribution networks that deliver electricity and natural gas in Missouri and Illinois. It serves 2.4 million electricity customers and more than 900,000 natural gas 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 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

Cohen & Steers Continues to Be Affected by Equity Market Selloff; FVE Lowered to $80 per Share

Business Strategy & Outlook

While the combination of rising interest rates and an equity market selloff has had an impact on Cohen & Steers’ levels of assets under management, they are cautiously optimistic about the firm over the near to medium term. Cohen & Steers came into 2022 with a record $106.6 billion in managed assets, split among its U.S. real estate (47% of total AUM), global/international real estate (18%), global listed infrastructure (8%), and preferred securities (25%) offerings. But market losses and meager flows during the first half of the year had left the company with $87.9 billion in managed assets at the end of June. So far, market losses are having a bigger impact on AUM than flows, with Cohen & Steers reporting a 12.3% (16.0%) market loss for its managed assets during the second quarter (first half) of 2022. This was better than the Morningstar Global Markets REIT TR Index, which was down 15.6% (20.0%) during the same time frame. Part of this is likely due to the firm garnering just two thirds of its total AUM from real estate investment funds, and some can also be attributed to active management.

While REITs have generally performed well during periods of rising long-term interest rates (based on studies done by NAREIT over the years), the current tightening cycle is a push by the Fed to fight inflation, which has been hitting levels not seen since the early 1980s. Rising rates and inflation can hinder external growth efforts for REITs (as acquisitions become less accretive) and pressure existing tenants, as well as provide investors with a less risky yield alternative in fixed-income securities (leading to outflows). It looks like most of Cohen & Steers’ investors are not running for the exits, though, as flows have been relatively flattish year to date. The firm’s institutional clients tend to be first to reallocate (and generally well in advance of Fed actions), so the fact they’ve not pulled out too aggressively is a positive. The Standard & Poor’s separation of real estate-related companies from the financial services sector has forced many institutional investors to maintain exposure to REITs, adding some stability to Cohen & Steers’ managed assets.

Financial Strengths

Cohen & Steers has not had any debt on its books since 2005. Based on what to be conservative long-term estimates for profitability and cash flows, the company is unlikely to need to tap the credit markets to fund its operations during the five-year projection period. Over the past 10 calendar years, Cohen & Steers has returned more than $1.1 billion to shareholders as dividends (utilizing both regular quarterly dividends and special one-time dividends to pay out capital) and around $130 million to shareholders via share repurchases (net of share issuances). Going forward, the firm will return just over half of its expected annual free cash flow (of around $270 million on average) to shareholders as dividends, with the rest spent on share repurchases or other investments (including seed capital for new products). At the end of March 2022, the firm had $115 million in cash and cash equivalents (including $30 million in U.S. Treasury securities) and $255 million in investments (including $63 million in seed capital) on its books.

Bulls Say

  • Cohen & Steers’ long record of successful REIT investing has allowed it to tap into demand for alternatives that offer diversification away from more traditional stock and bond offerings. 
  • The firm’s funds are entrenched in the broker/dealer market, and the company also garners close to half of its AUM from institutional clients, providing it with a relatively stable base of assets. 
  • At the end of March 2022, Cohen & Steers had $2.33 in cash and equivalents per share on hand, which could be used to fund a special dividend, a strategic acquisition, or to increase share repurchases.

Company Description

Cohen & Steers is a niche asset manager concentrating on real estate securities. The firm invests mainly in the equity shares of real estate investment trusts, with holdings in domestic and international real estate securities accounting for close to two thirds of its $87.9 billion in managed assets at the end of June 2022. Cohen & Steers also manages portfolios dedicated to preferred securities, utilities stocks, and other high-yield offerings. It expects to balance distribution among its closed-end mutual funds, open-end mutual funds, and institutional accounts over time. During the March quarter of 2022, the company garnered 40% (26%) of its managed assets (base management fees) from institutional clients, 47% (55%) from open-end funds, and 13% (19%) from closed-end funds.

(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 Re 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 slightly less than double-digit market share in both these divisions. This is a business that is characterized by underwriting and carving deep expertise in niche areas. While this may sound a bit wooly, some of this underwriting difference comes from the overall ownership of the underwriting process by Hannover Re’s underwriters. Company conceptualizes this 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 more authority and a better line of sight. Furthermore, it is anticipated that 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. This drives stronger retention rates, thereby lowering commissions 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 outlined, Hannover Re supports more premium per employee than other comparable. The outcome of this is tangible with the business benefiting from at least a 1 percentage point expense-ratio advantage.

Financial Strengths:  

Hannover Re has a sound balance sheet. It has one of the better balance sheets among the companies in European reinsurance coverage. While debt to equity is a little higher than the company would like to see at 36.8%, the debt to us looks quite clean because there is no hidden debt within equity. The maturity of the debt is relatively long-dated with the closest maturity arising in over five years. Overall, coupon rates are low and so the combination of the two is encouraging. Further recent debt issues have carried similar rates of interest.

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 comes through in its lean structure, lower expenses, and approach to capital management.

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 acquiring and favoring a strategy of special dividends over committing to buybacks when looking to return excess capital to shareholders. Company also finds the business innovative in finding alternative and unearthed profit sources.

(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

Munich Re is the largest reinsurer in the world by gross premiums written

Business Strategy & Outlook

Munich Re is the largest reinsurer in the world by gross premiums written. A business of this size in an industry that is geared toward diversification rarely has an opportunity to improve returns on equity beyond efficiency. By that, they carve out a superior competitive position by utilizing information technology and scale in order to drive down expenses. However, in the case of Munich Re, while the occurrence of this dynamic, the implementation of innovative technology was key to the ongoing strategic positioning and development of the business. What is witnessed is institutional knowledge that is being transferred from one specialist area within the business to a division that is more commonly associated as a commodity. In the years that this transfer has taken place, one can see an improvement in divisional operating metrics. For the business unit in question, to calculate this as operating profit over gross premiums written. 

More broadly, over the past two decades, only one of Munich Re’s divisions has earned its cost of capital: nonlife reinsurance. Here, the division has earned an implied 12.3% return on equity versus the 9.0% that at the group level. Returns to shareholders in the life reinsurance division have been anemic at around 4.7% over this same period. However, it is work in the primary insurance division that is creating a competitive tailwind, combined with a growing contribution from risk solutions that houses the Hartford Steam Boiler business and sits within nonlife reinsurance.

Financial Strengths

The Munich Re is generally in good financial health and one can assess this through the solvency position. Munich Re reported a 231% solvency ratio at the end of first-quarter 2022, above its targeted 175% to 220% range.

Bulls Say

  • Munich Re has one of the strongest management teams in European insurance coverage. 
  • There is a strong focus on innovation in the business that is unusual for a company of this size and leadership. 
  • The turnaround to date of Ergo has been strong. This division is now earning over its cost of capital and there continues to be scope for improvement.

Company Description

Munich Re is one of the largest reinsurance firms in the world. It also serves clients with primary insurance.

(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.

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