As many of you know, investing in banks is a strong no-go area for me. The reason for that is very simple: banks are tough to understand, and many have very questionable operating models.

The recent bankruptcy of Silicon Valley Bank ( $SIVB ) is just another example of a long list of banks going either bust or having very dubious business scandals.

On top of that, I’m not satisfied with the outcome of the great financial crisis in 2008. Many citizens experienced very severe economic consequences while at the same time, the government was bailing bankers out. In my opinion, this is wrong, especially knowing that banks have yet to pay the bills for all the mess they created.

Honestly, this is just what it comes down to for me.

Luckily though, it’s not all doom and gloom when it comes to investing in the financial sector. As an example, recently I realized that I developed a lot of interest in the insurance sector. This really sneaked in overtime, because currently I own the following insurance stocks:

Together they cover 10% of my projected annual dividend income (PADI) which means that it’s quite a significant amount already.

Having said that, the fun fact is that these are all European dividend stocks which is quite surprising (although you can argue Chubb’s American roots).

And it doesn’t stop here, because recently I have decided to expand my interest in the insurance sector by buying another additional European dividend stock.

Hence, today’s article is about Nationale Nederlanden Group ($AMS:NN). NN Group is one of the largest Dutch insurance and asset management companies which was spun off from ING Groep in 2016.

My stock purchase

On 16 February I initiated a position at 41.42 Euro and I bought those shares via my DEGIRO account.

Luckily though, Mr. Market got a bit moody and it offered me a much better price again on the 10th of March. In other words, I decided to average down and bought another tranche of NN Group shares for 37.00 euros each.

Actually, I’m convinced that this wasn’t the last buy because Mr Market continues to offer me some NN Group shares at very attractive prices 🤩

Why I wanted to own Nationale Nederlanden Group

It’s actually an interesting story. A few years ago, Pollies Dividend (his blog is gone) wrote an article about NN Group when it was trading in the low 20’s. At that time, I commented on his article that I would never buy such a company, because I treated all financial services companies the same.

In the meanwhile I continued to study the works of great investors and I started to understand what Warren Buffett sees in insurance companies. A concept like float is very interesting and it gives insurance companies very nice opportunities to increase its equity over time (if managed well of course).

Float
Insurance companies collect money in premiums and the majority will be paid back later to cover claims. The difference between premiums collected and claims paid out is the insurance float and they can invest this to generate an additional return.

Understanding this concept has been key when I started to buy insurance companies.

Pollie however, was already much wiser than me and he could see the real opportunity that NN Group provided to dividend growth investors.

Hence, I find this a nice example of where I quickly jumped to conclusion and where I wasn’t humble enough. This is a pity, because I didn’t allow myself the time to learn about insurance companies first.

Actually, this learning comes at a price, because the irony is that he is owning these shares at a 12+% yield on cost now.

Based on this, you can imagine how much I wanted to buy NN Group since I got my head wrapped around their business.

Dividend Growth Commitment

Unlike many other European dividend growth stocks, NN group is very explicit in their dividend policy. They state that they “intend to pay a progressive ordinary dividend per share” which is exactly what we want as dividend growth investors..

However, words are one thing, but the real proof is in their actual behavior. And good news, NN Group doesn’t fail to deliver:

There is a catch though, because NN Group was prohibited by the regulators to pay dividends at the start of the Covid-19 outbreak. This was just after the 2019 annual earnings were released, so the company couldn’t pay those dividends at that moment in time.

Luckily for investors, the board of directors are very shareholder friendly and they still paid the promised dividends the year after with the first interim dividend of 2020.

2022 Dividend

NN Group pays their dividend bi-annual and they just announced a 1,79 Euro final dividend for fiscal year 2022. This brings the total 2022 dividend to 2.79 Euro.

Guys, this means a whopping 8.3% dividend yield at today’s price! Tell me, where can you find these kind of yields right now with a relatively strong dividend safety profile?

Speaking of which.

I believe the dividend to be relatively safe. The company has a upper grade AA- credit rating, a 55% EPS payout ratio and enough opportunity to conservatively grow their earnings over time.

NN Group’s growth vectors

In fact, NN Group is a relatively slow-growing business. They try to continuously improve their competitive advantage via excellent customer and employee experience. I see this as a very wise focus, but the company already spots a relatively high penetration in their markets.

That’s why large growth really has to come from smart acquisitions where they can gobble up undervalued companies that directly contribute to their shareholder equity.

And this is what NN Group has done in December 2016 when they acquired competitor Delta Lloyd Gruop for 2.5 billion Euro.

However, the competition is not stupid. As an example, ASR Nederland bought Aegon quite recently which reduced the amount of takeover targets in the Dutch insurance and asset management market.

That’s why I wouldn’t mind if NN Group continues to look for opportunities, especially if we would experience an exaggerated overreaction by Mr Market.

NN Group Risks

There’s really one risk that I foresee for NN group and that’s the quality of their investments on the asset side of the balance sheet.

As an example, the below screenshot is from the investor relations presentation and I would’ve loved to see a bit less BBB and lower-graded corporate bonds.

Another risk I see is more a general risk and that’s the risk of a large catostrophy. These things happen from time to time and can impact an insurance company quite severely.

So far these risks have not played out for NN Group, but it’s important to do our own risk assessments when investing in dividend growth stocks.

Final Thoughts

I am very happy with my NN Group position even though the price continues to drop. It doesn’t make me nervous though, because I have seen this all too often over the last 8 years.

I would even argue that this is very normal to me. When I buy shares, they go down, when I sell shares, they go up.

At the same time I learned to not average down too quick, because this might also be a falling knife. That’s why I’m a bit on hold for now, but if the company so happens to drop below 30 Euros per share next month then I might buy some additional shares with my April money.

Having said that, last time you told me that you liked these shorter updates, so I decided to continue with this approach. I think it is a nice way to share with you my latest buys and sells.

Yours Truly,

European Dividend Growth Investor