Insurance giant Legal & General Group (LSE: LGEN) has been one of my favourite FTSE 100 stocks for years and it has more than justified my admiration. Its share price is up 92% over five years and 38% over 12 months, after shrugging off shocks such as the impact of pension freedom reforms on annuity sales.
Legal matters
Even better, L&G currently yields a juicy 5.31%, making it one of the most attractive income and growth stocks around. I would buy it yesterday, I would buy it today and I would buy it tomorrow. I see plenty of upside ahead but this isn’t the only insurance company on my shopping list.
RSA Insurance Group (LSE: RSA) has had a mixed time of it lately, and this is reflected in its stock performance. It trades just 25% higher than five years ago although it has been showing signs of greater urgency lately, rising 28% in the past 12 months. It has taken a knock today, falling around 2.25% on publication of its Q3 trading update.
Storm warning
This dip has mildly surprised me given that the report has been broadly welcomed by analysts. Its brief trading update showed an 8% increase in net written premiums to £5.077bn year-to-date, or 3% at constant exchange rates. Earnings per share (EPS) are ahead of last year but behind target.
The group’s underwriting performance was hit by the extreme Caribbean hurricane season, but sweep that aside and it is clear that underlying performance continues to improve. Premiums grew 5% in the UK, 8% in Scandinavia and 16% in Canada, with only Ireland disappointingly flat. The UK household insurance market is tough at the moment, but the group is taking action to mitigate that.
Write on
Group CEO and turnaround titan Stephen Hester said profits are ahead of the same period in 2016, although by less than targeted. “We are continuing to drive business enhancements across the group, whilst taking further underwriting action in some portfolios to improve performance for 2018.”
City analysts are upbeat, predicting 8% earnings per share (EPS) growth in 2017 then another 21% in 2018. Its forecast dividend yield is 3.4% but nicely covered two times, giving scope for generous progression. By 2018, the yield is expected to hit 4.5%, making it a great dividend stock. Trading at a forecast 15 times earnings, today’s dip looks like a buying opportunity to me.
Generally speaking
RSA is a general insurance specialist and a very different beast to L&G, which has a massive investment management arm, and it presciently made the move into low-cost index trackers before ETFs ruled the world. It recently posted a 43% leap in first-half profits after tax to £952m and hiked its interim dividend 7.5% from 4p per share to 4.3p, in line with its stated policy of paying 30% of the previous year’s total dividend.
There will inevitably be bumps in the road after five consecutive years of double-digit EPS growth. Another 13% increase is forecast for 2017, but then a 2% dip in 2018. I would view any slippage as a buying opportunity although trading at a forecast 10.7 times earnings I would buy it today.
L&G is vulnerable to a stock market downturn, RSA is vulnerable to the weather. This means they do not correlate and could therefore balance each other quite nicely.
