MMI Holdings took a hit on Wednesday after it suspended its cash dividend opting instead to buy back some of its shares.
Shares in the insurance group fell by as much as 8% by mid-morning, eventually closing 2.93% lower at R21.50 per share.
The initial sell-down was likely on the part of investors who held the stock for its 7% dividend yield as the group’s results were in-line with its trading statement, said Rahima Cassim, a fund manager at Ashburton Investments.
MMI, which paid out R2.5 billion in the form of a cash dividend last year, will not pay a dividend in the 2018 financial year. Instead it plans to distribute R2 billion to shareholders through a share buy-back scheme, taking advantage of the fact that shares in the group trade at discount of around 20% to embedded value (EV), which it puts at R27.05 per share.
Group financial director Risto Ketola said the decision would be value enhancing for shareholders as the group would acquire R2.5 billion of equity value for R2 billion of cash, thereby creating an uplift of 31 cents per share.
“The sustainability of the dividend was our chief concern in the last few months. And our view was that this was not a stock to own for the dividend as we did not believe that the business could continue to pay out the dividend while earnings kept decreasing, so it is not a shock to us. With the share price trading at a discount to EV, it is the right time to make a decision such as this, and when dividend payments are resumed, it will provide a positive boost,” said Cassim.
Ketola said the group would resume paying dividends when it is satisfied with the level to which the discount to EV narrows. However, its future dividend cover would be 2.5x relative to 1.5x to 1.7x currently, meaning the group’s pay-out ratio would fall to 40% from 60%.
According to Adrian Cloete, a portfolio manager at PSG Wealth, the lower dividend pay-out ratio is disappointing for the market as it implies lower future dividends. “If MMI can manage to buy its shares at a discount to its EV this will be more value accretive to shareholders than just paying a cash dividend. If MMI buys say R2 billion of shares at a discount of 20% to EV, this implies that they will have bought R2.5 billion of EV and therefore R500 million would be unlocked for shareholders, which would therefore enhance the overall EV by about 1%. In the long run, if management spends the extra R1 billion in cash that is retained by the higher dividend cover policy wisely in projects and investments that yield returns above the hurdle rate, then more value would be added to shareholders. Obviously it is key that the retained earnings are well spent in a way that adds long-term shareholder value,” he explained.
The update to the dividend policy is now consistent with its capital deployment and projected coverage profile, the group said.
For the six months to December 31 2017, investments in new initiatives along with weaker persistency levels at Metropolitan Retail and weaker profitability in select products at Momentum Retail contributed were a drag on earnings.
Diluted core headline earnings per share fell 3% to 97 cents, missing consensus estimates of 107 cents per share.
According to MMI, its operating businesses contributed R1.3 billion to core headline earnings of R1.56 billion. The figure is a 4% improvement on the prior year and would have been up 11% if early-stage investments in India, its aYo joint-venture with MTN and Money Management investments were excluded.
At Momentum Retail, headline earnings fell 10 to R567 million, while sales increased 3%.
Metropolitan Retail reported a 15% decline in headline earnings to R317 million as weaker persistency experience in policies aged six to 12 months came to bear. Its recurring premium volumes grew 4%, while new business volumes fell 5%.
An improvement in Momentum Corporate’s covered underwriting performance saw headline earnings jump 42% to R455 million. But new business volumes fell 24%. The apparent discrepancy comes after the re-priced existing schemes, in some cases increasing premiums paid by corporate clients around 30%, which saw some clients leave. “When we re-price because of a bad claims experience in the previous year, competitors that quote for the business would want and have that information. They would realise that they could undercut the price but then they would have to explain it following year. I think there is a bit of sanity that prevails, which is why we didn’t lose much of the business,” new chief executive Hillie Meyer said, when asked about the impact of price increase of competitivity.
Its international businesses reported an improvement in core headline earnings from a loss of R61 million to a loss of R27 million. MMI previously said it would exit businesses in certain African markets in order to refocus on South Africa and has now received five offers for some of those businesses.
Meyer will continue to execute the group’s client centric strategy, disclosed in 2014.
He said it is unlikely that Mary Vilakazi, who is to join FirstRand, would be replaced as deputy CEO. Instead her responsibilities would be spread across the executive team.