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How RSA Insurance Group plc Will Deliver Its Dividend

I’m looking at some of your favourite FTSE 100 companies and examining how each will deliver their dividends. Today, I’m putting RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSANY.US) under the microscope.

Dividend history

RSA was a shareholder’s nightmare after the turn of the millennium until 2003. The period saw dividend cuts, policy changes and a rights issue. Let’s not dwell in detail on those years of turmoil, and simply say that coming out of 2003, the company’s historic dividend was 4.52p and the board told shareholders: “Our policy is to at least maintain the current dividend … in real terms”.

RSA exceeded its minimum target over the following few years. The company stated within its annual report for 2006:

“As a reflection of your Board’s confidence in the future sustainability of the earnings of the Company, we announced at our preliminary results … a 35% increase in the final dividend for 2006. We plan to increase the 2007 interim dividend level by at least inflation plus 35% and thereafter plan to grow dividends at least in line with inflation”.

By 2011 the dividend had reached 9.16p, more than double the 2003 payout. However, the market was shocked — the shares dropped 14% on the day — when RSA announced a 33% cut to the final dividend for 2012, and an intention to make a similar percentage reduction to the 2013 interim. The interim results were released earlier this month and the upshot is that RSA’s historic 12-month dividend payout now stands at 6.18p.

Management blamed the cut on the prospect of prolonged low bond yields. The board said ‘rebasing’ the dividend would enable the company to invest for the future and pay a sustainable dividend from the lower base, adding:

“The Group intends to pursue a progressive dividend policy in line with the anticipated underlying growth in earnings”.

Dividend prospects

The analyst consensus is for earnings per share at 11.6p this year, rising 7% to 12.4p for 2014, with the dividend rising 3% from 6.3p (covered 1.8 times by earnings) to 6.5p (covered 1.9 times).

If the analysts are on the mark, dividend growth for the immediate future will be progressive but not spectacular. The compensation for the relatively modest growth is a high forecast starting income of 5.2% at a current share price of 121p.

After RSA’s dividend cuts during the early Noughties, the board was able to deliver 10 years of decent growth. A repeat of that would be rewarding for investors today on the initial forecast yield of over 5%.

However, I have to tell you that the Motley Fool’s chief analyst believes another Footsie blue chip — yielding 5.8% — is currently the UK’s top income stock. Furthermore, he reckons fair value for the shares is 850p compared with 733p today.

You can read our leading analyst’s in-depth review of the company in this exclusive free report.

The report comes with no obligation and can be in your inbox in seconds — simply click here.

> G A Chester does not own any shares mentioned in this article.