GMA - Income stock

Genworth Mortgage (GMA)

P = $3.00

P/E =9.8

Yield = 8.67%

AFR 3 Aug 2017 @ P = $3.2

The negatives outnumbered the positives by about 10 to one.

- gross earned premiums fell 7.7 per cent,

- interim net profit fell 34.7 per cent,

- insurance margin tumbled 15.4 per cent and

- return on equity fell 3.4 per cent.

- the company's loss ratio rose 1.8 per cent and

- the delinquency rate on its mortgages rose from 0.43 per cent to 0.51 per cent.

- financial guidance for the year to December: Net earned premium growth will fall by 10 to 15 per cent

- structural changes in the market, including Macquarie Group's decision to dump Genworth as its mortgage insurer. Westpac Banking Corp dumped Genworth in 2015 and there is talk National Australia Bank will do the same.

The market got excited for two reasons:

- the 14¢ a share dividend payment and

- the capital return through a $100 million buyback.

Genworth is not risk free. That means it is not immune from a crash in the housing market.

One investor in the stock said there were at least 3 reasons why he bought the stock.

1. "I am being paid a fully franked dividend yield of 10 per cent to hold a stock that is trading at a discount to NTA.

2. "Secondly, the company has excess capital and the capacity to increase that capital through more buybacks.

3. "Third, as the mortgage loan book matures the risks in the portfolio decrease."

By Market Matters 13 September 17

GMA provides mortgage insurance to borrowers on highly geared properties and has enjoyed a strong run in property over the past few years. Delinquencies have been low and therefore earnings have been strong, however the real story here is around excess capital on their balance sheet, and importantly their ability to return excess capital to shareholders.

As it stands, GMA is holding around $1 per share excess capital plus they recently announced an on market share buyback, of up to $100m of stock. The buyback is taking place on market at prices below book value which currently sits at $3.89.The buyback has now been underway since the 22nd August and the share price, reluctantly at first, has started to grind higher. On market buy-backs are supportive of price, however it does give the opportunity initially for reluctant holders to offload stock, so in some instances the share price treads water for a period, as was the case with GMA.

On our numbers, the company has bought back $11.2m worth of stock thus far, which is a tad more than 10% of the buy back. We like this stock at current levels, will continue to hold while the buyback plays out which should provide share price support while we collect a very good yield! We remain content holders.


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