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High Yielding New Zealand Stock Selection

The current low interest rate environment has been plaguing fixed interest dependent investors for some time now, and with the recent cut to the official cash rate (OCR) on the 10th of September by 0.25% for the third time, it looks as if the low interest rates are here to stay.

Equity markets have been generating a reasonable amount of interest, with many investors looking to substitute fixed interest and interest bearing deposits for equities. The current market environment is providing many opportunities for investors to purchase shares offering gross dividend yields in excess of 7%, which is attractive when you’re lucky to achieve a gross 4% per annum interest rate on a 5 year term deposit.

The below table is a snapshot of a few companies favoured by HHG that offer gross dividend yields in excess of 7% per annum.

We now go on to focus on Heartland Bank in more detail, Should you want to discuss any of the stocks mentioned above please contact your adviser at Hamilton Hindin Greene.

Company: Heartland New Zealand Limited

Sector: Banking

Overview: Heartland New Zealand Limited is a New Zealand-based bank that aims to provide small-to-medium sized businesses, the rural industry and individuals with a full range of finance, investment, banking and lending solutions.

Heartland Bank has not put a foot wrong lately, upgrading earnings forecasts on numerous occasions. The company confirmed a Net Profit after Tax for 2015 of $48m, which was at the top end of their range. They also forecast a Net Profit after Tax for 2016 of $51m to $55m, which are very solid growth levels for a company with a gross dividend yield in excess of 9%. The run of positive results saw the share price hit all time highs of $1.42 in February; however since then we have seen a drop in the share price, touching $1.07 in late August.

Pros: At current prices, Heartland has a gross dividend yield in the range of 9 percent; fairly attractive in this low interest rate environment. These low interest rates have no doubt helped Heartland’s cause as borrowing is encouraged, and savers are forced to scratch around for reasonable returns.

Heartland has delivered increases in interest revenue of 24% to June 2015, and profit before tax has increased 27%. Heartland has demonstrated their ability to generate sustainable growth; their tier 1 common equity capital ratio continues to increase relative to their conditions of registration, along with exceeding the total required capital buffer ratio by 94%. Capital adequacy is an important factor to consider when evaluating the financial position of banking institutions, due to the fact that capital adequacy ratios form part of their conditions of registration.

The net interest margin over their peers has contracted as Heartland has ticked off many regulatory and capital adequacy barriers. This includes gaining their banking license (with conditions), having these conditions lifted, and maintaining capital well in excess of regulatory minimums.

Cons: The capital adequacy ratios required by the Reserve Bank are part of a wave of new regulations introduced around the world in the wake of the Global Financial Crisis. These are designed to limit the chances of banks defaulting by requiring them to keep certain levels of equity and reserves.

Heartland sits well in excess of these at the moment, although as we have seen in the past, this is no guarantee of safety. One aspect that could work in Heartland’s favour is their limited exposure to international credit markets. Many larger banks rely on these markets for cheap short term funding, whereas Heartland receives most of their funding from local term & cash deposits, meaning Heartland should be less affected if international credit markets seize up.

In addition, Heartland has a 10 percent shareholding in peer to peer lending company Harmoney, and looking to grow their Home Equity Release (or reverse mortgage) business which they purchased last year. Both have a degree of execution risk attached.

Price performance: Long time holder Quadrant sold 8.75 percent of the company at $1.30 in May. Concerted selling since then has seen the share price trade down to $1.09 this week.

Investment outlook: With growing earnings and an attractive dividend, Heartland is still looking reasonably attractive, particularly given the low interest rate environment. The company has performed well for a new entrant, so is gaining respect in the market, which is now being reflected in the appreciating share price.

 

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