Today Genworth Mortgage Insurance Australia Ltd (ASX: GMA) released its earnings results for 31 December 2018, with net profit down 49%. The GMA share price bounced nearly 5%.
Genworth is an insurer of mortgages. It offers the product called “LMI” to banks for borrowers who are perceived to be riskier or can’t come up with an adequate deposit for a home. Net profit was down to $76 million, from $149 million in the previous year. Despite this, GMA shares were up as high as 13% to $2.56 in early trading.
It declared a fully franked dividend of 9cps, taking the total dividend for FY18 to 21cps (including a 4cps special dividend) representing a dividend yield of almost 8.97%, or 12.74% on a grossed-up basis, with a share price of $2.34 at the time of writing. Click here to learn what franking credits are.
GMA said its delinquency rate was up 7 basis points (bps) from 0.47% to 0.54%. This was attributed to two primary factors:
- A decrease in the policies-in-force following completion of the Lapsed Policy Initiative (2bps impact)
- An increase in delinquency rates year-on-year across all states (particularly in Western Australia, New South Wales and South Australia).
GMA Shares Appear Cheap
While the financial statements and annual report were not released today (they are expected to be released later this month), GMA last reported a strong balance sheet with its net assets or book value of ~$3.90 trading well above its share price of $2.34.
GMA has over $3 billion of investments in short-term deposits, government bonds and corporate bonds comprising almost 90% of its assets, with over $1 billion of unearned premium comprising almost 60% of its liabilities. Combined with a dividend yield of almost 10%, the shares certainly appear cheap. This is probably why the company also announced a $100 million share buyback today as well.
However, the devil is in the detail. Looking at the notes for unearned premiums reveals they are brought into account over a period of 12 years.
Are GMA Shares A Buy?
Given the unearned premiums relate to loans written over the last decade combined with the results from the Banking Royal Commission released recently, perhaps the unearned premiums are not as safe as previously believed.
There’s also the fact that Australia has gone over 25 years without a recession resulting in an abundance of credit, with many of these home loans written with interest rates at a record low, which is when people are most likely to over-commit on debt they cannot afford. If this is the case, then the unearned premiums sitting on GMA’s balance sheet could result in a rise in delinquency rates, especially if interest rates were to rise to their long-term average.
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