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Why Genworth Mortgage Insurance Australia shares are down despite a $100m share buy back

Genworth Mortgage Insurance Australia (ASX: GMA) has announced a $100 million share buy back as part of its first quarter 2018 market update.

The buyback was announced as part of an initiative to optimise the company’s capital structure and to maintain the Board’s targeted Prescribed Capital Amount of 1.32 – 1.44 times. The buyback is subject to shareholder approval at the company’s AGM in May.

If approved, the on-market buy back would represent almost 9% of the company’s shares outstanding at current prices.

Market drop

Despite the buyback announcement, Genworth shares were down 5% in early trade this morning, before recovering slightly as the company also reported a 70% decrease in 1Q18 underlying profit compared to 1Q17.

The company’s CEO also reiterated that 2018 would be a transitional year for Genworth as the impact of a 2017 earnings review will result in lower net earned premiums.

Foolish takeaway

Given that Genworth shares are near 52-week lows and the share price is down over 50% since its peak in February 2015, I think a buy back is not a bad idea.

The greater concern for investors is that the underlying performance of the business and its outlook is not great. Australia’s housing market has been the subject of much debate and credit agencies such as Moody’s have previously downgraded Genworth citing high and rising household debt as a risk.

Genworth is also in a competitive industry with other insurers such as QBE Insurance Group Ltd (ASX: QBE), also providing Lenders’ Mortgage Insurance.

Whilst National Australia Bank Ltd. (ASX: NAB) is already a Genworth customer, they and the other major banks Commonwealth Bank of Australia (ASX: CBA)Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ) also have the option of self-insuring as opposed to contracting Genworth.

If I was an investor looking at Genworth for its dividend yield, I’d rather start with these companies which are set to raise their dividend.

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It's been a nail-biter of a reporting season here in the first half of 2018.

But the real action, in my opinion, is what companies are doing with dividends.

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Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.

You can follow Kevin on Twitter @KevinGandiya.

The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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