Sampo: A Hold Following Special Dividend And Quarterly Earnings

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About: Sampo Oyj (SAXPF), Includes: NRBAY
by: Wolf Report
Summary

Sampo announced a special dividend payable at the end of August 2019, provided the board okays the transaction. The dividend comes in the form of shares of Nordea.

Shareholders get 1 Nordea share/10 Sampo shares. This puts the yield for this special dividend at roughly 1.5%, adding to the already generous ~7% company yield.

We look at the company's progress during 1Q19/2Q19 - which is mostly positive, with a few small one-time items affecting profitability.

As those of you following my articles may know, I don't own certain banks - namely Nordea AB (OTCPK:NRBAY) directly, but instead, own them through investment companies like Sampo (OTCPK:SAXPF). My portfolio allocation to Sampo is large, coming in at ~3%. This is something I'm very happy with because Sampo comes with not just banks but some of Scandinavia's leading insurance businesses across the Nordics and Baltics. You can read more about my thoughts on Sampo as an investment in my article entitled Sampo: State-Owned Dividends From Scandinavia, where I present the company from bow to stern.

Recently, the company announced the upcoming potential payout of a special dividend. This is not atypical for Scandinavian companies. Several of them, instead of providing static, high dividend growth rates, give the investor smaller dividend growth but compensate during lucrative times through the use of special dividends.

Let's take a look at what the case is here and also do a small thesis update.

Sampo - Special dividend and recent performance

So, Sampo isn't distributing an extra dividend because of strong recent performance. The reason for the payout is instead the group's target to reduce Nordea ownership to below 20% (from a current 21.2%), resulting in a change in the solvency calculation with regards to Sampo, then falling to a new solvency directive. (Solvency II). From the press release:

As a result of the distribution of the share dividend, Sampo's ownership in Nordea would decrease below 20 per cent. Hence, as of 30 September 2019, the Groups solvency would only be calculated in accordance with the Solvency II rules and Nordea shares would be treated as a normal equity investment. Sampo Group's solvency ratio according to the Solvency II directive amounted to 126 per cent at the end of March 2019. Taking the hybrid capital of EUR 500 million issued in May 2019 and the planned distribution of an extra dividend into account, the solvency ratio would have been approximately 169 per cent at the end of March 2019. Deconsolidation is subject to formal approval by the Finnish Financial Supervisory Authority and requires an application to be submitted by Sampo.

In the future, the Group's solvency would no longer be calculated by the conglomerate rules (FICO). The consolidation of Nordea as an associated company in Sampo Group's financial statement (IFRS) would remain unchanged.

(Source: Sampo Press Release)

I'm neutral on this deconsolidation as a whole, as I believe that Sampo will nonetheless remain a strong player with Nordea due to the tradition and interlacing of board member roles between the company. Additionally, Nordea moved its headquarters from Sweden to Helsinki, Finland, further strengthening the bank's ties to Finland as opposed to Sweden. The bank is the largest in the Nordics when looking at the geographic diversity of its customers, as opposed to say, Swedbank (OTCPK:SWDBF), which is the largest bank in Sweden alone.

The special dividend is, of course, a pleasant surprise. I haven't decided what to do with my shares long-term yet. These (a position of about 0.10% of total portfolio value) nonetheless come at a not-too-terrible time to invest in Nordea. Take a look at the graph below.

(Source: Google Finance)

At a 9.5% yield and the lowest share price in many years, one could most certainly argue that the time for an investment is now. However, Swedish banks, in general, are under strong current pressure, and a major downturn would only add more to that pressure - as such, I believe the bank can certainly go lower.

I already consider myself overexposed to the financial sector, in particular, Scandinavian finance, and I'm in no real hurry to add to a new Nordea position simply because someone entitles me with a small number of shares.

Sampo's plan is generous, coming in at about 1.6% yield on Sampo's current valuation in terms of the share payout plan. Because the transaction is 1/10 Sampo shares, fractional entitlements will occur for many shareholders, and these will be paid out in cash, not fractional shares.

For those of you interested in Nordea as a bank, I write more comprehensively about the company in my article, 'Nordea - Opportunity Rears Its Head'. The bank is certainly an appealing stock if your exposure towards financials is looking small.

Recent Sampo Results

Latest reported results were the 1Q19. These results were mostly positive:

  • An increase in profit across the board of 7%, with especially good performance from TopDanmark insurance.
  • A small increase in EPS of €0.01
  • A respectable increase in NAV from €20.60 to €22.03/share
  • Poor results from Nordea related to provisions for AML matters, which resulted in an RoE drop of almost 45%.

The poor Nordea results have several explanations, including provisions, and also the acquisition of certain portions of Gjensidige, which is now part of the bank. As can be seen in the bank's own 1Q19, Nordea nonetheless managed increased revenues due to improved fees/commissions, with income offset by increased regulatory costs and continuing margin pressure on lending in Scandinavia, and specifically Sweden.

Sampo's forward guidance for 2019 includes good operating results for all segments in 2019 while noting that particularly life insurance suffers from its close ties to capital market developments.

The overall tone of 1Q19 for Sampo is positive, given the profit increase for IF insurance and an expected combined ratio of 85-88% as well as the excellent TopDanmark results. Sampo's profit as a whole increased by 6% on a quarterly comparison and came in very close to €400M.

The weakness of the Swedish SEK continues to contribute negative FX effects, however.

Current company valuation

Sampo is not a company that I consider a particularly strong "BUY" at the moment, even though its P/E-rating is close to the recommended 14-or-below of my original article. Due to its diversification, it has not suffered the same drop in share price we can observe across the financial board in Sweden. Instead, the share price for the company has risen short-term and is back above €40/share.

(Source: Google Finance)

There was a small window during June 2019 when the stock was appealing, though I wouldn't call it a table-pounding opportunity at the time (given financial macro across Scandinavia), as I believe that there will be far better opportunities to get into Scandinavian finance going forward.

In my original article, I posited a ~38-40€ buy-in for this company. This recommendation remains. While I could not call it "wrong" to invest in Sampo at any share price that's fair in terms of its NAV and the company provides an excellent possibility for appealing exposure across the Nordics, I try to only get the best buy-in prices for purchasing stock in this sector - and at €40 or below, this company is incredible.

Volatility comes and goes, and during those volatile times, you'd be able to pick up Sampo for 35-36 (as back in 2016 when I purchased most of my position). Given the uncertainty we may be facing in the near future, I don't think it'd be wrong to look for valuations of P/E 13 or below for Sampo - as opposed to about 14, which would incidentally represent a share price of around/below €40/share.

Thesis update - what to do with the gains/shares

Sampo remains a strong recommendation for me. I'd like it if my articles could encourage even non-European investors to take a look at the company as in my mind, there are no better ways to get broad, financial exposure to the entire Nordic market. You get banking and insurance in an appealing package. An appealing package that's partially state-owned and yields almost 7% at the current share price. Comparative companies in the US, are to my mind, very hard to find. That's why the company is at the maximum generally accepted exposure of 3% of my portfolio - and in times of extreme undervaluation, I would even add further.

I just wish that more Scandinavian companies would begin with a quarterly or bi-annual payout, as I believe this annual payout strategy in combination with withholding complications scares away many foreign investors.

As for what I'll do with my Nordea shares - I'll keep them for now. They don't hurt my portfolio sitting there, and I like Nordea as a bank (even if I like to own them indirectly). I certainly can't be convinced to sell off shares of the largest bank in the Nordics at a multi-year low. The dividend-paid shares will, in turn, yield a nice dividend by themselves.

Sampo, as of this piece of news, also remains a general buy - just wait for a better price than the current market high is giving us.

Thank you for reading and checking in.

Recommendation

As of the writing of this article and a share price of ~43€/share, I consider Sampo a "HOLD" and recommend waiting for the next sub-40-drop if you're interested in buying the company. I will update this thesis if anything fundamental changes or if a buying opportunity presents itself.

Disclosure: I am/we are long SAXPF, SWDBF. 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: While this article may sound like financial advice, please observe that the author is not a CFA or in any way licensed to give financial advice. It may be structured as such, but it is not financial advice. Investors are required and expected to do their own due diligence and research prior to any investment.