Why the Saga share price could be heading back to 200p

Roland Head revisits his buy recommendation on Saga plc (LON:SAGA) and considers another troubled insurer.

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Last December’s profit warning from Saga (LSE: SAGA) caught investors by surprise. Seven months later, shares in the over-50s insurance and travel group still haven’t recovered.

But there have been no further profit warnings in this time. The group’s trading since December as been stable, suggesting that last year’s troubles may have been a one-off.

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Indeed, I believe that Saga’s 7% dividend yield could be a buying opportunity. I’ll explain more shortly, but first I want to look at another insurer that’s reported an unexpected shortfall in profits.

Earnings slump

Shares of sector specialist Beazley (LSE: BEZ) fell by 12% when markets opened on Friday, after the company reported a 64% drop in half-year profits. Pre-tax profit for the period to 30 June fell from $158.7m to $57.5m, missing analysts’ forecasts by a significant margin.

When I last wrote about Beazley — which specialists in catastrophe insurance — I suggested it could be “a buy-and-hold stock for the next decade.” I was optimistic that profits would recover strongly this year after being hit by the triple whammy of hurricanes Harvey, Irma and Maria in 2017.

Today’s figures suggest this recovery might be slower than I was expecting.

Not a catastrophe

According to the company, this slump in profits was caused by an increase in losses on certain property businesses and lower returns from the group’s investment portfolio.

To reduce future losses, pricing and terms have been tightened on some property policies. And investment returns are expected to improve as a result of higher US interest rates.

I don’t think either of these issues are showstoppers. But I suspect full-year earnings may now be lower than expected.

The right time to buy?

Last year’s hurricanes have allowed the firm to put up its insurance rates. During the first half of this year, gross premiums written rose by 15% to $1,323.8m. This should support higher levels of reserve releases in 2019. This money — cash held in case it’s needed for claims — is often returned to shareholders through special dividends.

I believe Beazley remains an attractive long-term income stock. But today’s figures are a little disappointing and the share price remains close to its all-time high.

I’d continue to hold after today’s news, but I’d wait to see if the shares get cheaper before buying anymore stock.

Should I buy Saga instead?

One of the highlights of last year’s Saga results was that the firm was able to reduce its net debt slightly, despite lower profits. This suggested that underlying cash flow remained quite strong.

Indeed, the results themselves weren’t too bad. Underlying earnings per share were almost unchanged at 13.8p, providing a decent level of cover for an increased dividend of 9p per share.

Trading so far this year is said to be in line with expectations, with both insurance sales and tour bookings broadly unchanged. Analysts are forecasting earnings of 13.4p per share, down slightly on last year’s underlying figure of 13.8p. The dividend is expected to be unchanged at 9p.

These projections give Saga a forecast P/E of 9.4 and a prospective yield of 7.3%. I think the shares could be a good buy for income at this level.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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