Summary in seconds
I continue to rate Shinhan Financial Group Co., Ltd. (NYSE: SHG) [055550:KS] stock as a purchase.
I reviewed Shinhan Financial’s fourth quarter 2022 financial results in my previous February 25, 2022 update for the company. I discuss the recent report from Shinhan Financial announcements regarding return on shareholders’ capital and its near-term outlook in this latest article.
I find it encouraging that Shinhan Financial has recently launched a new share buyback program, while remaining committed to quarterly dividends. The company should also present good results for the next quarter. As such, I believe Shinhan Financial should still warrant a Buy investment rating.
On October 6, 2022, Shinhan Financial released a new 6-K filing highlighting that the company “has taken a resolution to pay quarterly cash dividends.” Specifically, Shinhan Financial will pay a quarterly dividend per share of KRW 400 towards the end of this month.
This announcement will come as a relief to shareholders and income-oriented investors of Shinhan Financial. SHG had just switched from annual to quarterly dividends in the third quarter of last year, and there were concerns about whether Shinhan Financial would stick to its new practice of paying quarterly dividends in the economic environment. low current.
As it turns out, Shinhan Financial has sent a strong signal that it remains committed to its new policy of returning capital to shareholders of distributing dividends on a quarterly basis. More importantly, Shinhan Financial did not reduce its quarterly dividend payout, as its latest dividend of KRW 400 per share is the same as the company distributed in the previous quarter.
Looking ahead, consensus financial estimates from sell-side analysts according to S&P Capital IQ the data indicates that Shinhan Financial offers an attractive consensus on FY 2022, 2023 and 2024 dividend yields of 7.1%, 7.4% and 7.9%, respectively. Shinhan Financial’s decision to continue quarterly dividend payouts and maintain the same payout as the previous quarter gives investors confidence that the company will maintain its current dividend policy unchanged.
Redemption and cancellation of shares
Shinhan Financial also disclosed its plans to buy back shares and cancel treasury shares on the same day the company announced its latest quarterly dividend.
In another 6-K filing on October 6, 2022, Shinhan Financial disclosed that the company would spend approximately KRW 150 billion to repurchase approximately 0.8% of its outstanding shares between the date of the announcement and early January 2023.
It certainly makes a lot of sense for Shinhan Financial to embark on a share buyback program now, given its current stock situation.
The market currently values Shinhan Financial at a normalized P/E multiple of 3.5x for the next twelve months and a historical P/TBV (Price-to-Tangible Book Value) multiple of 0.45x. The stock’s long-term historical average valuation multiples are much higher by comparison. Shinhan Financial’s 10-year average P/E measure is 7.3x, while its 10-year average P/TBV ratio is 0.72x. Given Shinhan Financial’s undemanding valuations relative to history, the company’s current buyouts are expected to be accretive.
Additionally, Shinhan Financial announced on October 6, 2022 that it would cancel all shares of the company repurchased under the new share buyback program. For Korean companies in general, share buybacks do not necessarily result in a reduction in the number of shares, as most of these Korean companies will choose to retain these own shares for future equity compensation. As such, Shinhan Financial’s decision to cancel 100% of the shares repurchased under the new share buyback exercise should be viewed positively.
In conclusion, Shinhan Financial’s recent dividend and share buyback announcements suggest that the company has every intention of redistributing excess capital and cash flow to its shareholders.
Positive outlook for Q3 2022
In addition to encouraging announcements of return of capital from shareholders, Shinhan Financial’s positive near-term outlook should support its share price. The company is expected to release its third-quarter 2022 financial results at the end of October, according to the schedule for its latest quarterly earnings releases.
Based on consensus sell-side financial projections from S&P Capital IQ, Shinhan Financial is expected to see accelerating revenue and earnings growth for Q3 2022. Analysts see Shinhan Financial delivering +14.7% CAGR in Q3 2022, compared to its revenue increase in Q2 2022 of +8.6%. On the other hand, market consensus suggests that Shinhan Financial’s normalized EPS growth will accelerate from +5.0% in Q2 2022 to +48.2% in Q3 2022 on an annualized basis.
Two main factors support Shinhan Financial’s release of a solid set of results in the third quarter of 2022.
The first factor is the positive effects of a rising rate environment. Shinhan Financial’s group-level net interest margin is expected to decline from 1.94% in the second quarter of 2022 to 2.03% in the third quarter of 2022, according to consensus financial estimates.
The second factor is that Shinhan Financial is not expected to record large provisions in the third quarter of this year. As highlighted in its Q2 2022 earnings presentation slides, Shinhan Financial previously made substantial “preventive provisioning” and “anticipated credit costs based on a cautious economic outlook.”
Shinhan Financial remains a buy-listed stock in my view. The stock’s P/E and P/TBV valuations remain very attractive and the company continues to return a significant amount of capital to its shareholders.