A high-yielding stock that keeps raising earnings expectations

Tower (ASX: TWR), a New Zealand-based insurer, may have set a record for the most earnings guidance upgrades in a short period. Over just 14 months, the company raised its earnings expectations an impressive seven times.

Dual-listed on the Australian and New Zealand stock exchanges, Tower provides home, contents, car, business, landlord, and boat insurance across New Zealand and the Pacific Islands

Upgrades, Upgrades and more Upgrades

Tower’s earnings momentum has been remarkable. In 2024 alone, the company issued five guidance upgrades, culminating in a ten-fold year-on-year increase in earnings:

• February 14, 2024: FY24 underlying NPAT expected at the upper end or above $22–27 million.

• April 17, 2024: NPAT forecast raised to exceed $35 million.

• June 11, 2024: NPAT expected to surpass $40 million.

• August 8, 2024: NPAT projected to exceed $45 million.

• October 11, 2024: NPAT anticipated at approximately $83 million.

• November 28, 2024: FY24 NPAT delivered at $83.5 million, a dramatic leap from $7.1 million in FY23.

This upward trajectory continued into 2025 with two further upgrades:

• February 5, 2025: FY25 NPAT guidance revised to $60–70 million, up from $50–60 million.

• April 22, 2025: FY25 NPAT guidance lifted to $70–80 million.

The April 2025 upgrade highlighted “better-than-expected business-as-usual claims performance,” driven by prolonged favorable weather, lower inflation, fewer total-loss house claims, and improved risk selection.

Rewarding Shareholders

Tower’s robust earnings have fueled significant shareholder returns through dividends and capital management:

1. Dividends: For FY24, Tower paid a total dividend of NZ$0.095 per share (approximately A$0.073), delivering a trailing yield of 5.65% and a payout ratio of about 48%.

2. Share buyback: The company returned NZ$45 million in excess capital via a mandatory share buyback, equating to roughly 10% of outstanding shares. This initiative is expected to drive meaningful earnings-per-share accretion.

A Key Metric: Adjusted Solvency Ratio

A key metric for insurers is the Prescribed Capital Amount (PCA), the minimum capital required to meet regulatory solvency standards and absorb potential losses.

In New Zealand, Tower reports this as the “adjusted solvency ratio,” akin to the PCA ratio used by Australian insurers like QBE and Helia.

The past two years have been a golden period for insurers, with rising bond yields, higher premium rates, and lower catastrophe costs creating a favorable backdrop. Tower’s adjusted solvency ratio jumped from 175% in FY23 to 228% in FY24, reflecting $171.4 million in capital above the regulatory minimum (before the $45 million buyback).

This strong capital position mirrors FY21, when a 271% solvency ratio enabled a $30.4 million buyback and a 6% dividend yield.

A high solvency ratio signals financial strength, allowing Tower to pursue capital initiatives like dividends, buybacks, or strategic investments while maintaining a buffer against adverse conditions.

Macquarie thesis

Macquarie analysts remain optimistic about Tower, noting its consistent market share growth — a rarity among regional insurers. In a recent note, they highlighted “upside risk to FY25 catastrophe assumptions,” which could lead to a dividend surprise.

Macquarie forecasts a FY25 dividend of NZ$0.13 per share, implying a 9.5% yield. The analysts retained an Outperform rating, raising their price target from NZ$1.55 to NZ$1.58.