Shareholders of big composite insurer Aviva (LSE: AV) have enjoyed a good few years of gains, as the turnaround of the business has gained traction. The recent market sell-off has put a crimp in the performance of the shares for the year to date, but a 2% decline beats the 6% fall of the FTSE 100.
Non-life insurers Direct Line (LSE: DLG) and Admiral (LON:ADM) have performed even better, with their shares having risen 18% and 17%, respectively, since the start of the year.
However, beating all three by a country mile is Redde (LSE: REDD). This £466m AIM 50 firm released its annual results today. The shares are up around 3%, as I write, taking the year-to-date performance to +75%.
Redde works with insurance companies, insurance brokers and prestige motor dealerships, providing a range of accident management and legal services. Does this insurance-related business offer better prospects for investors than the insurance companies themselves?
Redde is certainly on a roll. In June, the company said its results were likely to exceed the upper end of market expectations; and they have actually come in somewhat better than the upgraded forecasts.
Turnover of £249m was up 26% on last year. Statutory earnings per share (EPS) increased by 31% (adjusted EPS by 12%), and the Board treated shareholders to a 20% hike in the dividend. The company has also continued to over-deliver on cash flow targets, and currently sits on net cash of £40m.
Digging further back than the latest year, an improving trend in the operating margin catches my eye. The figures for the last three years now read: 3.9%, 5.9% and 8.8%. So, we have a business that’s very much heading the right way on all key fundamentals.
What about valuation? Well, you’ll have to pay just over 19 times latest annual earnings to buy a slice of this business, although an 8.25p dividend gives an attractive running yield of 5.1%. (A 1p special dividend this year comes from some legacy settlements and can be considered a one-off.)
I’d be wanting to see earnings growth of around 15% for the year ahead to consider Redde good value at its current price. Such growth looks achievable, with a recently-announced acquisition of a leading fleet accident management firm expected to be immediately earnings enhancing and cash generative.
How does Redde compare with the insurance companies? Non-life insurers Direct Line (motor and home insurance) and Admiral (motor insurance and owner of comparison site Confused.com) are not only similar businesses, but also have a similar approach to delivering shareholder returns. Notably, they pay ordinary dividends, but also have policies of returning surplus cash via special dividends.
Direct Line’s ordinary dividend gives a running yield of 3.8%, with special dividends lifting the yield to 7.7% . I’m ignoring a recent one-off special from the sale of the company’s international division — a sale which also impacts earnings and dividend forecasts for next year. These put Direct Line on a price-to-earnings (P/E) ratio of 13.2, with a prospective yield of 5.8%. Meanwhile, the figures for Admiral are 15.4 and 6.2%.
The earnings ratings and yields of Direct Line and Admiral are somewhat more attractive than those of Redde, but it’s rather a case of swings-and-roundabouts, with Redde having stronger growth prospects.
Meanwhile, Aviva operates across the life and non-life insurance sectors, and its recent acquisition of Friends Life consolidates its position as the UK’s biggest composite insurer. Aviva offers diversification and scale that can’t be matched by its more specialist peers.
Aviva trades on a P/E of just 9.1 for next year, which is a bargain-basement rating, particularly as earnings growth is forecast to be in double digits. Add in a prospective dividend yield of 5.2%, and Aviva appears to be the pick of four stocks that all look decent value at the present time.
