NN Group Shares: H1 2024 Earnings Support High Dividend Yield (OTCMKTS:NNGRY)

Group NN (OTCPK:NNGRY) recently reported its H1 2024 earnings, which were positive, supporting its good appeal for long-term investors.

As I described in a previous article, I see NN Group as a welcome addition to the game European insurance sector due to an attractive combination of high dividend yield and cheap valuation. With the company releasing its H1 2024 earnings a few weeks ago, I think now is a good time to update its financial performance and investment case to see if it remains a good choice for long-term investors . .

H1 2024 Revenue Analysis

NN Group reported a positive operating performance in the first half of 2024 (H1 2024), being on track to achieve its business targets set for 2025.

In H1 2024, annual premium equivalent (APE) sales increased by 15% year-on-year to €451 million and value of new business (GNB) increased by 21% year-on-year to €137 million, showing that its business momentum is quite good in its business, which is auspicious for future earnings growth. This good sales performance was broad-based across all operating segments, even though protection remains the largest business unit, followed by unit-linked products and pensions.

Its operating result was €1.3 billion in the first half of the year, slightly down on the same period last year, thanks to its domestic activity in both life and general segments, driven by margin smaller technique in the life segment. and higher claims in P&C business.

Due to the slightly lower results, operating capital generation fell by 4% year-on-year to €959 million in H1 2024, a decrease that is justified by lower operating capital in the general segment in the Netherlands due to higher costs of damages. This was linked to heavy fire damage in the first half of this year, which led to a 27% drop in working capital in H1 2024. Despite this setback, NN Group’s strong trading performance bodes well for higher working capital in the coming quarters, sustained. NN’s decision to revise up its organic capital generation in 2025 by €100 million, now expecting it to reach €1.9 billion the following year.

Despite a lower operating result, NN Group’s net profit in the first half of 2024 was up 11% year-on-year due to lower special items, and its free cash flow was up 8% year-on-year, to almost 900 million euros.

Thanks to strong cash flows and slightly higher remittances from operating subsidiaries at the holding company level, its cash position increased to €1.36 billion at the end of June, even after returning more than €500 million to shareholders in H1 2024. This shows that its organic cash flow generation is quite good and is more than enough to finance capital returns, which shows that NN Group has a strong business model that is very cash generating.

In addition to good cash flow generation, its return on capital policy is also supported by its capital position, with its Solvency II ratio standing at 192% at the end of last June, quite close to the peak its target range of 150. -200% in the medium term.

This means that NN has a strong capital position and can offer an attractive shareholder remuneration policy as it does not have to retain large earnings. Indeed, that has been its strategy, delivering a growing dividend and carrying out share buybacks over the past few years.

Its latest annual dividend was €3.20 per share, representing an annual increase of 14.7%, while its most recent interim dividend was increased by 14% to €1.28 per share. Thus, its annual earnings-related dividend in 2024 is likely to rise by double digits to around €3.65 per share. At the current share price, this results in a forward dividend yield of around 8.2%, which is quite attractive for income investors.

However, according to analyst estimates, NN Group is only expected to increase its annual dividend to around €3.42 per share, representing an annual growth of only 7%, which seems quite conservative in my opinion. Therefore, the company appears to have room to beat market expectations for its dividend, which may be a positive catalyst for a higher share price in the coming months.

In terms of dividend sustainability, based on market estimates for its EPS in 2024, the dividend payout ratio is expected to be around 60% if its dividend is €3.65 per share, which is an acceptable ratio for a mature company like NN Group, so the dividend appears to be safe and the company can easily maintain a dividend growth trend without jeopardizing its dividend sustainability.

Beyond dividends, NN has also been doing share buybacks in recent years, which boosts its total return on capital, aiming to do share buybacks of around €300 million a year. This represents more than 2% of its current market value, meaning that NN Group’s objective is to return approximately 10% of its current market value to shareholders, showing that providing attractive shareholder remuneration is a key management objective, as it has done in the past. several years.

Another positive step for NN Group’s dividend sustainability is related to its real estate investments, which have been somewhat of a concern due to the cyclical slowdown in the housing market. However, there are positive signs of the sector’s recovery, especially now that interest rates have started to fall in Europe in recent months. Supported by positive market dynamics in the Netherlands and slightly lower rates, NN Group’s real investment portfolio reported an increase in valuation in H1 2024, mainly supported by residential properties in the Netherlands.

This is justified by the tight supply-demand situation in the country, which generally speaking has a shortage of available homes to meet strong housing demand, plus new construction has slowed due to higher rates over the past two years, leading to higher growth. rents and property prices across the country.

While in 2023 its real estate portfolio fell in value by about 10% and this was a headwind to earnings growth, in the first half of the year its portfolio increased in value by 0.6%, and in subsequent quarters further rating increases are expected. , supported by rising residential prices and interest rate cuts.

In terms of its valuation, NN Group is currently trading at around 0.65x book value, a valuation that is virtually unchanged from when we last covered it. This is one of the cheapest in the European insurance sector, which appears to be quite undemanding given NN Group’s good fundamentals and high dividend yield. Indeed, compared to its closest peers Ageas (OTCPK:AGESY) and ASR Nederland ( OTCPK:ARNNY ) company appears to be quite undervalued given that both of its peers are trading above book value.

In terms of its main risks, investors should be aware that insurance companies are exposed to several risks, such as natural catastrophes, which can have a negative impact on their profitability, but they see the major risk in the short term for the capital position of the NN Group and its dividend. is interest rate risk.

Indeed, given its business profile and exposure to long-dated debt, NN Group’s capital position has a negative sensitivity to falling rates, with a 50 bps steepening of the yield curve negatively impacting the solvency ratio by two percentage points. However, this appears to be a manageable sensitivity as the company has recently done extensive reinsurance to reduce its interest rate risk, so while a declining interest rate environment is not positive for capital ratio, its dividend appears to be assured for years to come. .

In terms of its main risks, investors should be aware that insurance companies are exposed to several risks, such as natural catastrophes, which can have a negative impact on their profitability, but they see the major risk in the short term for the capital position of the NN Group and its dividend. is interest rate risk.

Indeed, given its business profile and exposure to long-dated debt, NN Group’s capital position has a negative sensitivity to falling rates, with a 50 bps steepening of the yield curve negatively impacting the solvency ratio by two percentage points. However, this appears to be a manageable sensitivity as the company has recently done extensive reinsurance to reduce its interest rate risk, so while a declining interest rate environment is not positive for capital ratio, its dividend appears to be assured for years to come. .

Conclusion

NN Group reported a positive operating performance in the first half of 2024, auspicious of achieving its business targets in 2025. This clearly supports the return on capital strategy, which continues to be the most attractive feature of the case its investment. Additionally, its shares appear to be undervalued in the European insurance sector, making NN Group an interesting choice for long-term income.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.