HGH - Heartland Group Holdings

[Snoopy]

A little less draconian than the UK regulator which just issued an edict banning the large banks and building societies from paying dividends in 2020 (including already declared dividends from 2019 profits), conducting share buy backs or paying staff bonuses.

https://www.stuff.co.nz/business/120...rbnz-announces

From a shareholder perspective, it doesn't seem much less draconian. No dividend for Heartland shareholders for the foreseeable future. For me it makes little difference because I was part of the DRP anyway.

I have highlighted how Heartland doesn't generate any cashflow anyway, on an operational basis. The 'illusion' of sustainable dividends was always offset against cash issues of new shares, the DRP, and large bond issues as ways of bringing more cash into the business. Really all this reserve bank measure has done has made official the situation Heartland has been in since its formation. Those of us who have studied the accounts have known this for a long time. This announcement will have no effect on my own investment position in Heartland. Happy to hold through the rebuilding phase.

SNOOPY

[Beagle]

Other than the chance of a really protracted Great Depression, (low chance of that in my opinion), I think they will be fine.

Posted 31 March 2020. I think the chances of that are increasing by the day. RBNZ should prop up the system though and their balance sheet is in very good shape to weather this crisis.

[ScrappyO]

Ive done the opposite and bought this morning. See what happens...….

[Snoopy]

https://www.stuff.co.nz/business/120...rbnz-announces

From a shareholder perspective, it doesn't seem much less draconian. No dividend for Heartland shareholders for the foreseeable future.

I may have been premature with this:

https://www.nzx.com/announcements/351120

"Importantly, the distribution restriction applies to Heartland Bank, and not to Heartland. Heartland’s Board will consider the impact (if any) of the restriction on its own, separate, dividend policy, and when considering the dividends that it may wish to declare (if any) to its shareholders in due course."

Heartland Bank cannot pay any dividends to Heartland Group Holdings. But it looks like there is a window for HGH shareholders to have a dividend to be paid after all, paid for from the Australian business which is 'not a bank', as so would not be covered by any pending future Australian rulings applied to banks 'over there'.

Jeff does it again!

SNOOPY

[RTM]

So Heartland Bank and other registered banks have had their core funding ratio reduced from 75% to 50% by the Reserve Bank and also basically been told to get out there and lend to their business customers under the "Government's Business Finance Guarantee Scheme".
But conditions include no dividends while this situation lasts which obviously does not preclude HGH from paying dividends. But I would expect and hope HGH follows the spirit of this condition and suspends dividends for a time and lends money out to businesses in need

That’s all fine and dandy Iceman, but there are also a group of people who have budgeted on the dividend as part of their income. I hope some compromise can be found, as long as HGH is not made insolvent.

[dabsman]

HGH and Heartland Bank are different entities.

Importantly, the distribution restriction applies to Heartland Bank, and not to Heartland. Heartland’s Board will consider the impact (if any) of the restriction on its own, separate, dividend policy, and when considering the dividends that it may wish to declare (if any) to its shareholders in due course.

[Bjauck]

That’s all fine and dandy Iceman, but there are also a group of people who have budgeted on the dividend as part of their income. I hope some compromise can be found, as long as HGH is not made insolvent.

The HGH dividend yield was high. However the fact of the matter, there are few individual shareholders in NZ these days, and even fewer for whom dividend income would form a major part of their total income. So their protestations would not figure highly in government policy formulation. I think suspension of dividends is sensible in the circumstances, even though I will miss the payment.

Most NZ banks are controlled overseas with overseas shareholders. So the ban on bank dividends would be seen as positive from a NZ political and electoral aspect. Such is the result of overseas ownership of so much NZ business. Government proscriptions on returns from NZ real estate ownership would be a different matter.

Disc: Still a HGH & ANZ shareholder.

[Snoopy]

Year	Dividends Paid 'per share'	Significant Event During Year'
FY2013	1.5cps(sp) + 2.0cps	17th December 2012: Heartland becomes a bank
FY2014	2.5cps + 2.5cps	1st April 2014: Seniors 'Reverse Mortgage' Business Acquired
FY2015	3.5cps + 3.0cps	10th September 2014: invests in Harmony P2P startup
		28th October 2014: Credit rating upgraded from BBB- to BBB (Fitch Ratings)
FY2016	4.5cps + 3.5cps
FY2017	5.0cps + 3.5cps
FY2018	5.5cps + 3.5cps
FY2019	5.5cps + 3.5cps	1st November 2018: Heartland Group Holdings restructure set up
FY2020	6.5cps + ?.?cps
Average FY2015.5 to FY2019.5 inclusive	8.80cps

I have chosen to use the last ten half years of operation as indicative, as this period includes the full contribution of the Reverse Mortgage Portfolio, a critical component of Heartland going forwards.

Year	Dividends Paid 'per share'	Significant Event During Year'
FY2013	1.5cps(sp) + 2.0cps	17th December 2012: Heartland becomes a bank
FY2014	2.5cps + 2.5cps	1st April 2014: Seniors 'Reverse Mortgage' Business Acquired
FY2015	3.5cps + 3.0cps	10th September 2014: invests in Harmony P2P startup
		28th October 2014: Credit rating upgraded from BBB- to BBB (Fitch Ratings)
FY2016	4.5cps + 3.5cps
FY2017	5.0cps + 3.5cps
FY2018	5.5cps + 3.5cps
FY2019	5.5cps + 3.5cps	1st November 2018: Heartland Group Holdings restructure set up
FY2020	6.5cps + 0cps
Average FY2016 to FY2020 inclusive	8.20cps

We are more than six months out from any expected final dividend. But I am going to make the bold prediction that there will not be one. What does this do to the Dividend Capitalised valuation of HGH? First see what the five year dividend average is.

I have chosen to use the last ten half years of operation as indicative, as this period includes the full contribution of the Reverse Mortgage Portfolio, a critical component of Heartland going forwards.

SNOOPY

[Beagle]

I think you are right and there won't be a final dividend this year.

[Snoopy]

Plugging in a representative yield of 7.5%, one that IMO represents an appropriate risk for the ups and downs of the banking cycle of Heartland in its current form, we can now arrive at our 'Capitalised Dividend Model' valuation

(Representative Dividend per Share) / (Acceptable Gross Yield) = Share Price (an algebraic manipulation of: Dividend per Share / Share Price = Yield )

8.8c / (0.72 x 0.075) = $1.63

A reminder here that NTA was

($675.668m - $72.679m) / 569.338m = $1.06 cps

at the full year FY2019 balance date. This means my 'fair valuation' is at a good premium (+54%) to net tangible asset value.

This $1.63 valuation is measured at the average point in the business cycle. My rule of thumb is that over the business cycle the actual share price will fluctuate between 80% and 120% of capitalised dividend fair value. This gives a target range of $1.30 to $1.96. $1.59, where the share is trading today, looks a few cents below fair value. My target accumulation price (10% below fair value) is now $1.47.

Events have certainly moved on since my FY2019.5 year calculation. I have to ask the question, given the economic shock, should I still be happy with a 7.5% yield from a second tier financial institution? My initial thought was no. But then I realised that coming out of this, interest on bank term deposits are likely to be materially lower than the all time lows we have been experiencing of late. We might even be faced with a generation who do not know what interest is, because no bank pays it anymore! So I have decided my 7.5% figure is still appropriate. 7.5% does reflect a higher risk in an even lower interest rate environment going forwards!

Plugging in a representative yield of 7.5%, one that IMO represents an appropriate risk for the ups and downs of the banking cycle of Heartland in its current form, we can now arrive at our 'Capitalised Dividend Model' valuation

(Representative Dividend per Share) / (Acceptable Gross Yield) = Share Price (an algebraic manipulation of: Dividend per Share / Share Price = Yield )

8.2c / (0.72 x 0.075) = $1.52

A reminder here that NTA was

($675.668m - $72.679m) / 569.338m = $1.06 cps

at the full year FY2019 balance date. This means my 'fair valuation' is at a good premium (+43%) to net tangible asset value.

This $1.52 valuation is measured at the average point in the business cycle. My rule of thumb is that over the business cycle the actual share price will fluctuate between 80% and 120% of capitalised dividend fair value. This gives a target range of $1.22 to $1.82. $0.95, where the share is trading today, is 37.5% below fair value. My target accumulation price (10% below fair value) is now $1.37. But is any of this realistic in the current investment climate?

SNOOPY

P.S. This iteration assumes no 4.5c March 2020 dividend which is not what happened. Refer back to Iteration 1 (post 13004) for a better valuation.