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Summary

  • ING hasn't paid a dividend since 2008 after it has been bailed out.
  • However, the final tranche of state aid is expected to be repaid shortly, which opens the door for a dividend reinstatement.
  • Based on preliminary company guidance, I expect the dividend yield to be 5-6.5% down the road as the net profit will increase due to lower risk costs.

In this article, I'll have a closer look at ING Groep (NYSE:ING) and explain why I'll take a position in its common shares as the dividend is expected to be reinstated shortly. I will explain what needs to happen before the dividend can be resumed and will make an attempt to determine the magnitude of the dividend.

The 2008 Bail-Out

ING Groep is a large financial institution (focused on banking and insurance) headquartered in the Netherlands and was hit very hard in the 2008 Global Financial Crisis. Long story short, the Dutch government had to step in and bail ING out with a 10B EUR ($13.8B) capital injection. Fortunately the climate got better fast and the group was already able to repay half of the state aid back just 13 months later in 2009. Since that date, ING continued to repay the state aid and restructured its assets as was requested by the European Commission in order to get the state aid approved.

(click to enlarge)

Source: company website

ING repaid another 1.225B EUR ($1.7B) in March of this year which means that there currently is just 1.025B EUR ($1.4B) left to be paid back (consisting of 683M EUR in principal amount and 342M EUR in interest payments and premiums). One of the conditions of the state aid was that an additional interest rate of 8.5% would be payable if ING would pay out a dividend to its common shareholders. As this interest rate was relatively high, ING elected to forego all dividend payments to its common shareholders and hasn't paid a dividend since August 2008.

The correlation between the state aid and the dividend

However, as the state aid is almost paid back (and will be paid back by March 2015), the door to restart dividend payments is wide open, and the bank has been publicly hinting at a dividend reinstatement from 2015 on. On top of that, the group has also been hinting it could repay the state aid before the due date in March 2015, so I'd actually expect ING to already repay the final part of the state aid in H2 2014 which should pave the way for a dividend restart within the year.

So the big question is how high will the dividend be? As ING had to get rid of some of its subsidiaries, the group has been restructured dramatically and the profit will obviously lower than during the pre-GFC era. That being said, ING has said it would target a payout ratio of 'at least 40%', which already gives a good indication to what we can expect. ING Group has reported a net profit of 3.2B EUR in 2013 and this should increase to 3.6B EUR in 2014 and probably 4.4B EUR in 2015 as ING is targeting a higher return on equity (10-13% versus 9%), which I expect to be very achievable given the fact that the company's risk costs are (should be) going down (the impairment charges are expected to decline).

So what does this mean for the dividend?

ING has said it's targeting a payout ratio of 'at least 40%', so let's see what this would mean based on my expected net profit for the bank. As ING plans to expand its balance sheet and lending pattern throughout the next few years until 2017, I will increase the net profit by 2.5% per year in the period from 2015 to 2017, and will assume a steady-state net profit thereafter. These numbers are in EUR as ING reports in EUR. As such, the dividend in USD will be varying depending on the EUR/USD rate. I have added a column using a 1.38 exchange rate. I did NOT take any share buybacks into account, even though I personally believe ING could start to repurchase shares from 2016 on. If just 25% of the net profit would be spent on share buybacks, the amount of outstanding shares could decrease by 2-3% per year, thus increasing the EPS and indirectly the DPS.

YEAR

NET PROFIT (M)

EPS (EUR/share)

DPS a 40% PAYOUT

DPS a 50% PAYOUT

DPS (40%) IN USD

DPS (50%) in USD

2014

3600

0.95

0.38

0.48

0.52

0.66

2015

4400

1.16

0.46

0.58

0.63

0.8

2016

4510

1.19

0.48

0.6

0.66

0.83

2017

4620

1.22

0.49

0.61

0.68

0.84

2018

4625

1.25

0.5

0.63

0.69

0.87

So as you can see, based on the guided payout ratio and expected net profit, ING Groep will very likely pay a substantial dividend down the road and I expect the company to pay a dividend yield of at least 5% from 2018 on. This yield could be increased should ING decide to repurchase shares once it has reached the desired capital ratios. Keep in mind these calculations are based on my own (relatively conservative) assumptions.

Conclusion

ING will almost certainly resume its dividend payments the moment it repays the state aid. As the company is generating 3.5-4B EUR per year in net profit, the final tranche of the state aid of 1.03B EUR will probably be repaid later this year so that dividend payments can be resumed from next year on. As ING is a profit machine (again), I expect the reinstated dividend to be quite substantial and am targeting a dividend of 0.69USD/share from 2018 on, which means that you're looking forward to a 5% yield based on the most recent closing price.

I currently have no position in the common shares of ING, but I do own some of the US-listed preferred shares and have written put options which I hope will end up in-the-money so I can start stockpiling ING shares before the dividend is resumed.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no position in ING's common shares but do own some of its preferred shares and have written put options.

Source: Anticipate And Prosper - ING Groep Will Be A Dividend Champ Again