Special dividend up for grabs: Helia delivers a 12% yield

A dividend yield of more than 10% is typically unsustainable and largely the result of a falling share price, which artificially inflates the yield. However, Helia (ASX: HLI) has been one of the few companies to deliver a sustainable double-digit yield, and has once again delivered at its 2024 full year result.

Helia (formerly Genworth Mortgage Insurance) is an Australian mortgage insurance provider and has helped more than 31,000 Australians achieve home ownership in FY24.

2024 Results highlights

The below beat/miss refer to Goldman Sachs estimates as at 14 February 2025.

• Insurance revenue down 9% to $389.2 million (3.8% beat)

• Underlying net profit after tax down 11% to $220.9 million (4.6% beat)

• Final ordinary dividend of 16 cents per share (vs. 15 cps estimates or 6.6% beat)

• Full-year ordinary dividend up 7% to 31 cents per share

• Special dividend of 53 cents per share (vs. 25 cps estimates or 112% beat)

• On-market buyback increased to $200 million (from $100 million)

• Underlying return on equity down 120 bps to 19.9%

The stock will trade ex-dividend for both the final and special dividend on 20 March and payable on 3 April.

Helia is trading around the $5.40 level at noon, which implies a dividend yield of approximately 12.7%.

How does Helia pay all this?

At first glance, Helia’s earnings appear to be going backwards, yet it is paying out a massive dividend and has doubled the size of its on-market buyback. To understand how the company can return so much capital to shareholders, we need to look at a key metric – the prescribed capital amount (PCA) coverage ratio.

The PCA ratio measures an insurer’s available capital relative to its regulatory capital requirements, ensuring the company has enough financial resources to absorb potential losses and meet its obligations.

In its half-year 2024 results (August), Helia reported a PCA ratio of 2.08x, equating to $390 million in surplus capital above the target range. By its third quarter 2024 trading update, the PCA ratio had expanded to 2.23x, or approximately $460 million in surplus capital — significant for a company with a market cap of around $1.5 billion.

This strong capital position has enabled Helia to fund shareholder returns, including a special dividend and additional buybacks. After paying out the final and special dividend and completing the $200 million buyback, the PCA ratio is expected to settle at around 2.10x (or plenty of room for further capital initiatives, subject to earnings and insurance trends).

Earnings outlook

Macquarie analysts expect Helia’s earnings to decline over the next two years. The forecasts below are based on their October 2024 estimates, but given the company’s 2024 earnings beat, analysts are likely to revise their outlook for FY25-26. However, the overall trajectory is still expected to trend lower.

Source: Macquarie Research October 2024

While these forecasts will likely be adjusted in the coming days, they reinforce Helia’s strong capital position and ability to sustain its market-leading dividend.

Another key catalyst to watch is Commonwealth Bank’s LMI contract, which was opened to competitive bidding on 19 June 2024. This is significant for Helia, as the CBA contract accounted for approximately 53% of its GWP in FY23. The current agreement expires on 31 December 2025, after which other providers will have the opportunity to compete for the partnership.

There is a risk that Helia could lose this key contract, and the forecasted FY24-26 earnings decline may already reflect the possibility of a partial or full loss of CBA-related earnings.