In yesterday’s Black Monday trading, there was one bright spot in the FTSE 100: RSA Insurance Group (LSE: RSA) rose as investors anticipated an improved offer for the firm from Zurich Insurance.
That hope became a reality this morning, when RSA announced a revised proposal from Zurich proposing a possible all-cash offer of 550p per share.
Although RSA has not yet received a formal offer from Zurich, the two firms have been in close negotiations and RSA’s board has said that it would recommend a 550p offer to shareholders subject to certain other details being agreed.
RSA boss Stephen Hester is thought to have been looking for 600p per share, while Zurich is thought to have been targeting a price range of 500-525p. Today’s deal looks like a decent result all round, in my view, especially given the market slide since discussions started.
However, Zurich hasn’t yet made a formal offer. RSA’s share price reflects this. The insurer’s shares are up by 5% to 520p this morning, 5.5% below the proposed offer price.
The question for shareholders is whether to sell RSA now and go bargain hunting elsewhere, or hold on until a formal offer is received.
Both approaches have pros and cons, but in the remainder of this article, I’m going to highlight a few reasons why selling now could be the most profitable move.
1. RSA isn’t cheap
One way of deciding whether to sell is to ask whether you would buy a share at its current price. While Zurich is taking a very long view with its purchase of RSA and can probably justify paying 550p per share, I don’t think many private investors would pay this much.
RSA shares have now risen by more than 25% since early July, from a low of around 400p. This has left the insurer trading on a fairly pricey 2016 forecast P/E of 16.4, with a prospective yield of just 2.8%.
2. Other insurers look cheap
In contrast, RSA peer Aviva trades on a 2016 forecast P/E of 9.0 with a prospective yield of 5.2%, while commercial insurer Amlin has a 2016 P/E of 12, and a whopping forecast yield of more than 6%.
By selling RSA and buying an insurer such as Aviva or Amlin, you should be able to lock in a high yield at a very reasonable price. This approach also avoids the risk of a sharp loss if the Zurich offer isn’t confirmed.
3. Buy when others are fearful
Warren Buffett famously suggested that investors should be greedy when others are fearful. Monday’s slide suggests there is a lot of fear in the market, but for investors with a long-term view, I reckon there are plenty of bargains on offer.
Consider Royal Dutch Shell, trading at 9.8 times 2016 forecast earnings with a yield of 7.4%. Or Neil Woodford favourite GlaxoSmithKline, which offers a yield of 6.2%.
Investors looking for a new turnaround play might want to consider Standard Chartered, Centrica or perhaps J Sainsbury, all of which offer yields of more than 4% — plus the potential for longer-term capital growth.
The FTSE looks like a buyers’ market to me.
