This big insurer looks a good bet at a low price for income seekers.
Is there anywhere you can get a reliable 9% return? Obviously, the short answer is "no, you can't". But RSA Insurance (LSE: RSA) comes very close.
In my view, RSA has been hit by overall sector weakness which isn't justified on an individual level due to its conservative investment profile and diversification.
The leading international commercial insurer has seen its share price dip from a relatively recent peak of 143p last February to 108.5p today, going under £1 in December.
High price, low price -- which is best?
Depending on your investing strategy and viewpoint, the fall could be good news or bad. For income-seekers, it's unequivocally good news as long as the fundamentals remain in place. I think they are; some think they aren't. That's what makes a market, of course.
And when a yield is as high as RSA's anticipated pay-out of 8.6% for this year, rising to 9.2% next year, with a complex insurance giant, then this should be ringing a few alarm bells.
But it's ringing too many for me. This is mainly due to the way in which RSA invests and the determination the company will have not to cut the dividend.
The share price suggests RSA will, or at least may, cut the dividend at some point. If it does so, and it is entirely possible as we've seen in the past with other big insurers in lean times, then it will lose a huge amount of trust in the City. And that's bad news for any company, but more so for insurers than most.
When such companies do cut the yield, they tend to do a simultaneous "kitchen sink" job, to minimise the risk of any further bad news and ensure it won't happen again for a long while. Such a watershed can be a good time to buy. But I digress; I don't think this will happen. Quite the opposite, in fact.
News or views?
Personally, I try to listen to company-specific news, rather than fearful generalised views.
The last really serious news we had from RSA came in on 3 November with the IMS. We were told that all was going well; net asset value per share was 106p, driven by retained profits, foreign exchange gains and a reduction in the pension scheme deficit. The main business of home and motor insurance is strong. And RSA expects to deliver a combined operating ratio of better than 95% for the full year in 2011. This certainly doesn't hint at a dividend cut.
Specifically on the eurozone crisis, RSA said its exposure to government bonds in Greece, Italy, Ireland, Spain and Portugal was £146m -- around 1% of the total portfolio. And we're reassuringly told that the company maintains a "low-risk investment strategy" with the portfolio dominated by high-quality fixed income and cash assets.
RSA's outlook for the year was positive, and it reported an 11% rise in net written premiums. The new CEO said he is confident in RSA's "ability to continue to meet our targets and deliver sustainable profitable performance".
On the other hand, the dividend coverage isn't hugely comfortable. Anticipated earnings for the full year vary between 12.5p and 16p, with a consensus of 14.4p, while the brokers' dividend per share expectations are for 9.36p for the year just gone, rising to 9.98p next year. And full-year earnings last year of 10.7p were just over half the equivalent figure for 2007. Mind you, the share price was up around 150p back then.
What helps give me confidence, though, is RSA's diversification. Less than 40% of its revenues are generated in the UK. The rest comes mainly from Canada, Scandinavia and emerging markets in Asia and Latin America, which are providing growth.
RSA has increased its dividend every year since 2005 with an average growth rate of 13.5%. This growth doesn't need to continue, though. Just holding it steady would be quite sufficient.
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More from David Holding:
> David owns shares in RSA.
