Maiden Holdings Might Fall To $8.55 A Share

| About: Maiden Hldgs (MHLD)


Maiden Holdings has increased its dividend since the company’s public listing in 2008.

MHLD is one of those rare stocks that failed to recover after the 2016 market correction, prompting investors to ask whether now is the correct entry point.

An excess returns model on the intrinsic valuation for MHLD gives the answer.

This is an excess returns model intrinsic valuation for Maiden Holdings (NASDAQ:MHLD). This article is a reader request on behalf of user artailguy. He states:

"MHLD… is a reinsurance company that acts like a perfect dividend growth stock."

Indeed, my research into the reasons investors have bought MHLD results in a resounding answer: The dividend. MHLD has increased its dividend since the company's public listing in 2008:

While the dividend increases have taken a 60% nosedive, you will find few investors complaining. Certainly, it is hard to constantly raise dividends by double-digit percentages. Most investors are happy as long as the dividend is constantly growing, which is the case for MHLD.

MHLD is one of those rare stocks that failed to recover after the 2016 market correction:

This prompts the question: Is MHLD undervalued? We attempt to answer this question with the excess returns model (ERM). Unlike the discounted cash flow (DCF) model, ERM applies specifically to financial companies.

The Excess Returns Model

Because financial firms are inconsistent with their reporting of free cash flow, DCF models tend to be highly inaccurate here. A company such as MHLD, which makes its profits from investments, is better evaluated by its capital invested and the return on that capital. ERM is a much more accurate model in this regard as it includes these variables as well as the opportunity cost of investing in the company of interest versus competing businesses.

This model was developed by a professor at the Stern School of Business and the model's theory can be found here, here and here.

For now, I will apply this model to MHLD in hopes to answer whether the company is now undervalued due to the pullback. This valuation will give us a good starting point in our decision regarding MHLD. Let's begin.

Applying the Model to AFL

When looking at the model results, we should consider three aspects:

  1. The ERM price in respect to the stock price.
  2. The ERM price movement in regard to the stock price.
  3. The trend of the ERM price.


The results appear below:

The first issue is that the price of the stock is 50% higher than the ERM price. This would imply that the stock is overpriced by roughly 33%. Notably, the stock was consistently underpriced until early 2015, when the ERM price dipped 50%.

In regard to the stock price trend vs. ERM price trend, we see both moving in tandem until recently. Following the ERM price trend as a guide for when to buy or sell would have told us to buy up until late 2015, which is right before MHLD dropped 15%. In other words, the ERM price seems to be predicative of what happens to the stock price.

As for the ERM trend, the price was moving upward until early 2015, when things reversed. The model implies that early 2015 was a good shorting opportunity for the stock, and it would have been correct. The model is still implying this, which brings us to the question: Why?

Short MHLD?

I already know my answer to this question: no. The reasons are two-fold: First, shorting a stock with nearly 5% yield is just silly. You will be forced to pay that dividend in addition to interest on the shares borrowed.

Second, you could short MHLD by options strategies. However, the options on MHLD are illiquid and the downside for MHLD, going by the ERM model, is only $4. With -100 delta options, this equates to $400 on a long-term position (after all, MHLD is a slow mover). We could get the same ROI from a day trade on Facebook (NASDAQ:FB).

But still, others are shorting MHLD:

Short interest is way up. Some might attribute MHLD's fall to the rise in short positions. This seems wrong, as the stock continued to rise after the spike in short positions, which started in late 2013.

Perhaps these bears know more than we do? Turning to the ERM model, I do see a few problems with MHLD.

First is return on equity (ROE). MHLD's ROE is quite high, at nearly 10%. However, remember that the ERM model includes opportunity cost.

Investors in the financial sector have nearly 300 other stocks that are outperforming MHLD in ROE. In addition, non-dividend stocks are outperforming MHLD in terms of returns. While MHLD does not look bad at all from an ROE perspective, we have had better choices since 2015, which drags down the model's valuation of the stock.

In addition, the outstanding shares have grown precipitously over the last couple years:

Institutional ownership is slightly down, while outstanding shares are up. This share dilution hurts the ROE per share, thereby hurting the valuation of each share.

Advice for Investors

Consistently raising a dividend does not make a company a "perfect dividend grower." It does make a company a strong consideration for a dividend growth portfolio, but the opportunity cost of investing in a stock such as MHLD should be considered, both in the financial sector and in the general market. While we see nothing bad with MHLD itself, the valuation implies that:

  1. The stock price will continue dipping, making it a bad buy at this moment
  2. We have better choices for dividend growth stocks at the moment

In other words, put MHLD on your watch list and consider buying after the rest of the industry tanks or when the general market tanks. These will be times in which the ERM valuation rises after the stock price falls, giving you a great entry spot. This also would be a good time for MHLD to engage in buybacks (assuming they have nothing better to do with their cash).

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Disclosure: I/we 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.