Standard Life (LSE: SL) reported its results for the first half of the year today, and while the group’s reported revenue came in below expectations, underlying figures showed that Standard has a bright future ahead of it.
Indeed, as more customers looked to Standard to manage their pension assets, the group reported cash inflows of £7.1bn during the first half of the year. Overall, during the first half, Standard’s assets under management expanded 1.7% to £250bn. These figures include the loss of one major client.
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Unfortunately, even though Standard’s assets under management expanded during the first six months of the year, the company suffered from market volatility. Specifically, the investment return Standard generated on assets it manages for its insurance business fell significantly, and group revenue took a hit as a result. Group revenue fell 8% year-on-year, and gross earned insurance premiums declined 6%. Net profit jumped 400%, although this was due to a large one-off gain on the sale of Standard’s Canadian business.
Standard’s results clearly benefited from the company’s shift away from insurance and more toward asset management — a shift that should only accelerate growth going forward.
In particular, Legal & General, one of the UK’s largest pension providers, believes that over the next 15 years the value of savings in UK defined contribution pension schemes will nearly quadruple to approximately £3.3tn by 2030.
The key driver behind this trend will be workplace pensions. Standard is the leading provider of workplace pensions in the UK, which really showed through in the company’s first-half results released today. Moreover, shareholders are reaping the benefits from Standard’s growth.
Standard’s shift to a fee-based business model has led to a tripling of cash flow generated from operations since 2010. Most of this cash has been returned to investors. Since 2010 Standard Life has returned 147p per share to investors, including the recent special dividend and over five years the shares have produced a total return of 180%.
Old Mutual is also charging ahead when it comes to growth. During the first half of the year, the company’s sales expanded 18%. City analysts expect the company’s earnings per share to grow by 9% this year and then a further 10% during 2016. Old Mutual currently trades at a relatively undemanding forward P/E of 10.7 and supports a dividend yield of 4.6%. The payout is covered twice by earnings per share.
But one of the best picks to benefit from the growth of the UK pension market would have to be Aviva. After merging with Friends Life earlier this year, Aviva is now the UK’s largest pension savings providers. This unrivalled scale should enable Aviva to achieve economies of scale and reduce costs to a level that will push competitors out of the market.
It’s estimated that Friends will boost Aviva’s cash flow by an additional £600m per annum. The extra cash flow, coupled with cost savings realised from the merger, should allow Aviva to raise its dividend payout. Based on current City forecasts, Aviva’s shares will support a yield of 4.2% for full-year 2015, and 4.9% during 2016.