A compelling idea
While Mr. Market is in a pessimistic mood again looking at the Italian financial sector, investors are in for another opportunity to grab some shares buying on the dip. In this article, I suggest readers take a closer look at Intesa Sanpaolo (OTCPK: OTCPK:ISNPY), one of the strongest players in the industry. As I believe the company is solid and risks have been overstated by the market in the recent days, the proposition seems to provide an interesting risk-reward profile. The company is planning to pay a coupon for FY2016, representing a yield of 8.5% based on the current share price. The cash distribution has already been approved by the management and, after the formal approval of shareholders, is set to be paid in full on May 24th.
As I already wrote during last year about the menace hovering over the Italian banking system, for those who have not a clear picture I recommend taking a look at my previous article on the matter here. I do not feel the situation has dramatically changed over the past few months, and while some steps have been taken to safeguard the stability of the system as a whole, the sure fragility of some actors is still dragging down the whole financial sector in Italy. High risks in large NPL positions and lackluster profitability due to ECB interest rates policies have certainly plagued the industry in recent years, but things might just be about to turn around as interest rates restart to rise also in Europe. Talking specifically about Intesa dividend, as I consider the pending approval of shareholders to be only a formal step, I believe there is no real risk involved. The management has already stated its intent to raise the distribution further in 2018 to a total payout of $ 3.4 billion, a 13% increase from current levels.
Intesa intrinsic value
Intesa Sanpaolo is currently trading on the Italian stock exchange (BIT: ISP) at around € 2.10 per share. I believe the company to be undervalued, with a fair value estimate of at least € 2.50 per share (20% upside). The average analysts TP for Intesa is € 2.60, with a mean consensus of outperform. While analysts' figures should always be taken with a grain of salt, Intesa shares recently edged towards TP even in the midst of industry headwinds, before taking a fresh dip in January. Data published in February alongside the Q4 earnings call suggest the fall does not find any justification in the firm's fundamentals, which have slowly but continuously improved in recent quarters.
Selling put options: raise your yield further
I see limited downside from here, but for investors not yet convinced to start a long position, there might be an even more interesting way to play on the long side. I suggest to consider May Put options with strike price € 2.10 (expiry date is May 19th). While I believe the share price will most certainly bounce back from current levels and these options will expire unexercised, in the case of a further dip they are effectively providing an entry point for investors at a price of € 1.95. This means a very attractive coupon for Intesa shares with a yield above 9%. Personally, I would consider any price below € 2.00 to be definitely worth the risks associated with shares ownership.
Author's advice and disclaimer
Although Intesa Sanpaolo ADR shares can be traded on the pink sheets, the company is also traded on a larger float on the Italian exchange. Prices in the article have referred to such shares which are denominated in Euro and derivatives traded on the Italian Derivative Market (IDEM). Please be aware of the associated risks. The author is not a registered investment advisor and asks investors to always perform their own due diligence before taking any course of action on the financial instruments discussed in the article.
Disclosure: I am/we are long INTESA SANPAOLO S.P.A ON THE ITALIAN STOCK EXCHANGE (BIT: ISP).
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.
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