Company: Tower Limited
Overview: Tower had lofty ambitions in 2006 when it split off its Australian business and raised capital to expand New Zealand operations. Unfortunately this strategy proved to be faulty for Tower, and acquisitions were never made. Having sold down much of the business in the past two years general insurance is now the foundation of Tower's earnings. The company realised a total of $370 million from the sales of its health, insurance and wealth management businesses as well as the sale of most of its life insurance business unit. So far the company has returned $172m of those funds to shareholders in the form of two capital returns.
Pros: Investors will be leaning on Tower to make further capital returns but this will depend on the capital requirements of the company. Along with the potential for capital returns, Tower investors can hope for increased market share in the general insurance market. This will require Tower to leverage its strong brand and good record (having settled 80 per cent of Canterbury Earthquake claims well above the industry average). Along with the excess capital from the sell down Tower have to keep a large balance on call to cover any potential claims. The returns on these retained funds should increase in the medium term as interest rates start to tick up.
Cons: The sell down of assets has led to many questioning the growth potential of the company. Without the scale to match its Australian-owned counterparts Tower must now differentiate itself with customer service and unique offerings. As with every general insurance company Tower will be concerned with the apparent increase in extreme weather events of late (2013 being the second most expensive year on record for New Zealand weather related claims according to the Insurance Council of New Zealand). This, along with the earthquakes has also seen premiums rise across the board.
Price performance: The share price has done little but traded between $1.50 and $2 in recent years. The stock is down 6 percent in 2014 to recently trade at $1.64.
Investment outlook: The company is expected to pay out over 90 per cent of earnings in dividends which could see yields in the 10 percent range. Once the fog of restructure clears, Tower could prove to be a beacon of light for value investors.
*A Broker's View is written by Grant Davies, Authorised Financial Advisor at Hamilton Hindin Greene Limited. This article represents general information provided by Hamilton Hindin Greene, who may hold an interest in the security. It does not constitute investment advice. Disclosure documents are available by request and free of charge through www.hhg.co.nz.
- Fairfax Media