Investors Can’t Get Enough of Genworth’s Eroding Earnings

Yesterday, Genworth Mortgage Insurance Australia [ASX:GMA] was one of the best performing stocks on the ASX. The company rose 5.2% to $3.20 per share.

If you’re unfamiliar with the business, Genworth provides lenders mortgage insurance. This essentially protects the bank if borrowers are unable to repay their mortgages. The risk of default, in most cases, is therefore transferred over to the insurer rather than the bank.

On the same morning that Genworth rose, the company also released their first half yearly report for FY17. But unlike what you’d expect when investors rush to buy, revenues and earnings didn’t outperform.

Instead, revenues consisting of gross premiums and unearned premium both fell 3.9% and 16.9% respectively. The drop in revenues caused profits for the period to plummet 34.8%.

Are investors just crazy? Why would they jump into a business after their earnings power takes a beating? Well, there is a reason.

It’s not always about earnings

There are two things that Genworth is doing that investors love. The company is paying a 14 cent dividend, and plans to buy back $100 million worth of shares.

As reported by the Australian Financial Review (AFR):

These capital management moves go to the heart of the market’s misunderstanding of exactly what Genworth is about.

Rather than being viewed as a mortgage insurance company in decline with a grim earnings outlook it can be seen as a capital-generating machine.

Also, there are good reasons why it should stay that way for several years to come.

But earnings growth is not why you invest in Genworth. It’s also not why it was spun off from its US parent, Genworth Financial Inc. [NYSE:GNW] — who still owns 52% of the Australian company.

Instead, Glenworth was created and should be thought of as a cash cow.

The AFR continues:

In Australia the normal interim and final dividends have been topped up with special cash dividends in 2014, 2015, 2016 and again in 2017. Genworth also had a capital return in 2016.

And just yesterday, Genworth said they would pay an interim dividend of 12 cents per share, along with a special dividend of 2 cents per share. Chuck in a $100 million buy back and what more could income investors want?

Härje Ronngard,

Junior Analyst, Money Morning

PS: It’s not always the blue chips that have the best dividend yields. Income specialist Matt Hibbard has written a new report — ‘Top 5 Dividend Stocks in Australia for 2017’ — all about the best Aussie dividend stocks.

Some of the stocks Matt mentions pay reliable yields of 6%, 7%, 8% and more. That’s more than 5% what you’d get on an Aussie 10-year bond for just slightly more risk.

To get your free copy of Matt’s report, click here.

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