HGH - Heartland Group Holdings

[Snoopy]

Yeah your choice. A bank stock under $2 and a kiwi bank. ...

The fact that the Heartland share price is under $2 ($1.70 as I write this) is not indicative of anything. Have a bonus issue of shares such that the number of shares increase to ten times the number we have now and the share price would drop to 17c. Cancel shares to the extent that the number on issue is only one tenth of what we have now and the share price would jump to $17. Keep the business the same, change the number of shares on issue and the share price can be engineered to be anything you like. But all such changes have no effect on the underlying business, or a new investors expected returns.

keeping profits in kiwi land...

Not entirely true. Many of those retained profits are being used to expand Heartland's business in Australia

I wish it was slightly cheaper yet it's a good gamble isn't it

Cheaper is always better from a new investment perspective. In my view $1.70 is within the fair value range, but not particularly cheap.

I need to qualify what I just said then. If Percy's increasing dividend projections come to pass, then you could argue HBL is now good value. But IMO you have to consider other possible future scenarios as well.

For example, what would happen if the milk priced tanked again? A couple of years back when this happened, Heartland issued a special press release explaining that their dairy exposure was only 7% of the portfolio. As it happened Heartland backed their farmer customers, the milk price recovered and any potential problem never materialised But now the dairy portfolio is up to 8% of all company loans. And there is no guarantee that if there was another milk price fall that things would recover as quickly. I am not suggesting here that the milk price will definitely tank again. Nevertheless you might want to invest in Heartland, assuming there is a one in ten chance (say) that it will. Even if the chance is small, the effect could be significant. So this is one scenario you cannot ignore IMO.

Another scenario is that Heartland could bid for UDC. They have already said they would need to issue new capital to do that. It is likely that new capital would be discounted below the current share price. When you invest, all the possible alternative outcomes need to be considered.

SNOOPY

[janner]

It's all a bit of a gamble isn't it? I don't have a future ball and don't have many certainties about what happens tomorrow and in the future. Thank you for pointing it out that I am, in your view, in the wrong play ground.

Yes it is a bit of a gamble.. Also I do not have a future ball.. My response to RB was an answer to him.. Not promising him any certainties.. Just hopefully giving him some of my many years of experiences..
Do not understand how or when I even mentioned you... !!!!..

[Ggcc]

Wasn't heartland planning on another cash issue? If so would the future dividend not be diluted? I do think HBL is a fair price for now, but who knows what the future will bring for the share price.

[iceman]

Wasn't heartland planning on another cash issue? If so would the future dividend not be diluted? I do think HBL is a fair price for now, but who knows what the future will bring for the share price.

Not sure if HBL is on record planning another "cash issue". But for me it is clear that a significant portion of their growth is from Reverse Mortgages where, at this early stage in that business, the cash flows out faster than it flows in. Winner69 & Snoopy have pointed out the "capitalised interest" in recent posts and worried about it. But I think it is mainly from the fast growth in RM and perfectly understandable.
Time will tell how HBL will fund the fast growth in RM. Cash issue, bonds, DRP, SPP or a mixture of all ? Who knows ? But they will need cash to grow the business. No doubt.

[winner69]

Wasn't heartland planning on another cash issue? If so would the future dividend not be diluted? I do think HBL is a fair price for now, but who knows what the future will bring for the share price.

Wanting more capital is good. It means growth, particularly the HERs, is still happening.

Borrowing more is one option but got to watch those equity ratios

They pay too much of profits out in dividends

[percy]

Wanting more capital is good. It means growth, particularly the HERs, is still happening.

Borrowing more is one option but got to watch those equity ratios

They pay too much of profits out in dividends

Yes should they continue to achieve very strong growth they will require more capital in the not to distant future.
Low growth, and more capital will not be required for some time.
The dividend policy is a strong attraction for investors relying on dividends.
So it is six of one, and half a dozen of the other.

[winner69]

Yes should they continue to achieve very strong growth they will require more capital in the not to distant future.
Low growth, and more capital will not be required for some time.
The dividend policy is a strong attraction for investors relying on dividends.
So it is six of one, and half a dozen of the other.

A person who doesn’t understand the mysteries of finance and how it all works might ask a simple question like ‘what’s the point of asking shareholders for $59m and then paying them back $50m in dividends?’

That’s HBL over the last 12 months

[percy]

A person who doesn’t understand the mysteries of finance and how it all works might ask a simple question like ‘what’s the point of asking shareholders for $59m and then paying them back $50m in dividends?’

That’s HBL over the last 12 months

Perhaps they may,then again perhaps they may not.!

[iceman]

A person who doesn’t understand the mysteries of finance and how it all works might ask a simple question like ‘what’s the point of asking shareholders for $59m and then paying them back $50m in dividends?’

That’s HBL over the last 12 months

Fair point. But many will understand and join the DRP to avoid undue dilution. A difficult line to tread

[Snoopy]

I didn't think my post would be outdated in just ten days. But with the announcement of today's (foreshadowed) capital raising in Australia for 'about $A20m', which at $NZ1= =$A0.909c is equivalent to $NZ22m, it is time to update the Heartland 'capital flow' table.

Financial Year	Capital Notes Issued during FY	New Shares Issued during FY	Total Shares on the Books EOFY	Net Money Raised During FY (excl. Capital Notes)	Dividends Paid	ROE
2013	0 m	0 m	388.704m	$0m	$13.951m	7.2%
2014	0 m	75,562 m	463.266m	$64.774m	$19.930m	8.0%
2015	0 m	6,624 m	469.980m	$9.163m	$30.188m	9.9%
2016	0 m	6,579 m	476.469m	$6.798m	$37.690m	10.7%
2017	$22.000m (f)	30.973m+	512.902+ m	$45.277m+	$39.485m (f)	tbc
Total Cash Raised	$22.000m			$126.012m +
Total Cash Returned					$141.244m

(f) indicates forecast result.

The picture this table draws is truly astonishing. If you add up the amount of capital that stakeholders have put into the business over the last five years, it now exceeds the total dividend flow that Heartland has paid out over that same time period!

Put another way, those mother shareholders who put their capital into Heartland probably expected this 'growing baby' to suckle at the parent shareholders' teat, while it built up its strength to prosper as a fully fledged 'grown up' Company. However, this aggressive little Heartland pup clearly did not want to make that break with Mum and Dad shareholder investor. While apparently distributing a generous flow of dividends, the aggressive Heartland jaws subsequently latched back onto those shareholder funds again by way of DRPs and cash issues. And now, from a total stakeholder perspective (including the new Aussie bondholders) those aggressive jaws have not only sucked the stakeholders dry. They have taken a solid bite out of the teat that feeds it!

Plenty here have claimed over the years that Heartland was not 'short of capital'. At one stage even Heartland themselves talked about the possibility of a capital return. However, following a 'look at what I do ' method rather than the 'look at what I say' method of investment, it is now clear what Heartland's true capital appetite was. Heartland have been very clever to raise all of this new capital at what were largely premium prices. Kudos to Heartland management for that. But those stakeholders looking for a 'solid net dividend return' may have to pause for thought.

Winner has looked at what Heartland has asked of their funding stakeholders over the last year. It must be time to update the Heartland hunger for 'capital flow' table for the last five years:

Financial Year	Capital Notes Issued during FY	New Shares Issued during FY	Total Shares on the Books EOFY	Net Money Raised During FY (excl. Capital Notes)	Dividends Paid	ROE
2013	0 m	0 m	388.704m	$0m	$13.951m	7.2%
2014	0 m	75,562 m	463.266m	$64.774m	$19.930m	8.0%
2015	0 m	6,624 m	469.980m	$9.163m	$30.188m	9.9%
2016	0 m	6,579 m	476.469m	$6.798m	$37.690m	10.7%
2017	$22.000m	40.215m	516.684m	$50.991m	$41.977m	10.6%
Total Cash Raised	$22.000m			$131.726m
Total Cash Returned					$143.736m

Notes

1/ The Australian 2017 'Subordinated Unsecured Capital Notes' issue for $A20m, which at $NZ1= =$A0.909c is equivalent to $NZ22m, was confirmed on April 7th 2017, and therefore issued in FY2017.
2/ ROE figures calculated using normalised earnings based on equity on the books at the end of the financial year.

If you add up the amount of capital that 'funding stakeholders' (bondholders and shareholders) have put into the business over the last five years, it exceeds the total dividend flow that Heartland has paid out over that same time period by $10m. Note that the five year time period I have chosen deliberately excludes the establishment capital raising that was used to create Heartland in the first place. Winner says that Heartland should pay out less of their profit as dividends, and so reduce their need to raise new capital at the same time. But as this table shows, Heartland have been quite adept at raising new capital to the extent that all of the capital paid out as dividends (and $10m more) over the last five years has now been 'reclaimed'.

Heartland management has been quite clever at pandering to the dividend hounds. Probably there are several holders of Heartland today who would not invest in Heartland if there was no dividend on offer, Some of the generous dividend is reclaimed immediately via the DRP. The rest is taken back later (not necessarily from the same individuals it was paid to) via share cash issues and bond issues. The net effect is that in the five years ended June 30th 2017 Heartland has paid out a net nothing. Yes the underlying business base has grown over that time, even if no net cash has been generated. So what we have here is a share with 'ponzi type' characteristics. As long as there are confident funding stakeholders willing to put up more cash, the Heartland business will continue to grow, But as soon as Heartland loses the confidence of its funding stakeholders, the cash needed to expand the business will dry up and growth will stop. And we all know what would happen to the share price if that were to happen. This is the primary reason I don't invest in Heartland. A great business will generate lots of cash. Heartland generates none.

SNOOPY