A small premium increase for home buyers requiring mortgage insurance is providing a big boost in expectations for Genworth MI Canada Inc.
The move is expected to help solidify Genworth as a capital generator that benefits investors through a steadily rising share price and increasing dividends, analysts say.
Genworth, the Toronto-listed subsidiary of U.S.-traded financial services company Genworth Financial Inc., underwrites mortgage default insurance for residential properties.
Analysts are becoming more bullish on Genworth after it said last week it would raise mortgage insurance premiums by an average of 15 per cent starting May 1, matching a move from Crown-corporation competitor Canada Mortgage and Housing Corp.
At least two analysts have since changed their recommendations to "buy" from "hold" and a handful have raised their price targets, even though the impact from the premium increase isn't expected to show up in earnings until 2016 because of the accounting treatments in Canada.
A total of four analysts now have a "buy" recommendation on Genworth, while five still recommend it as a "hold," according to S&P Capital IQ. The analyst consensus price target over the next year is $37.78, according to Thomson Reuters.
CIBC World Markets analyst Paul Holden estimated the premium increase will boost earnings per share by 18 per cent. He upgraded his rating on the stock to "sector outperformer" from "sector performer" and raised his price target to $42 from $36.
"I think it's a matter of the market fully appreciating the true economic impact of the 15-per-cent increase," Mr. Holden said. "It benefits cash flow and capital and those factors can be used to increase dividend and buyback stock. There are potential tangible benefits to shareholders."
Because the premium increases are small, averaging about $5 a month, they aren't expected to deter home buyers.
Genworth has "strong credit quality and sustainable return on equity, which should drive continued capital returns to shareholders," said Macquarie Capital Markets Canada Ltd. analyst Asim Imran.
The company's current dividend yields about 3.9 per cent, which is line with other financial services companies.
Genworth stock closed at $36.71 on Tuesday, not far from its record high of $37.44 in early January. The shares have risen 45 per cent over the past 12 months, outpacing other insurers and all of the big banks.
Analysts are awaiting the effects of new capital requirements for mortgage insurers coming from the Office of the Superintendent of Financial Institutions (OSFI). Any changes, expect to be put in place next year, could affect how much money the company has to set aside.
"We do not expect the overall impact of these changes to be material," an OSFI spokesperson said in an e-mail Tuesday. (OFSI says it's also working on a draft of the new separate capital guideline for mortgage insurers, but that process is further out.)
Cormark Securities analyst Jeff Fenwick said Genworth is overcapitalized, and that any regulatory changes could provide the "clarity" required for the company to distribute more capital to shareholders through dividends and share repurchases.
"With premiums set to rise and potential capital relief forthcoming, MIC is well positioned to begin producing a higher level of [return on equity]," he said in a note. "MIC" is the company's stock symbol.
Canaccord Genuity analyst Evan Minsky has a "hold" on the stock and a $35.50 price target, believing the shares are "fairly valued."
BMO Nesbitt Burns analyst Tom MacKinnon raised his price target to $37, but also maintained a "hold" on Genworth. "It's a defensive story," he said. "If the equity market had a run, this would not be a stock that would run with that."