Shares of Standard Life Aberdeen (LSE: SLA) rose by 3% in early trade this morning, after the asset manager announced plans to return £1.75bn to shareholders following the sale of its life insurance business.
Unfortunately, other figures in today’s half-year results weren’t quite so impressive. Excluding the life insurance business, which is being sold to specialist insurer Phoenix Group, adjusted pre-tax profit was £311m. That’s 12% lower than for the same period last year.
The main problem facing the firm is that investors are continuing to withdraw their cash from its funds. Although the group saw £38bn of inflows during the first half, these were outweighed by outflows of £54.6bn. As a result, assets under management and administration fell by £16.6bn to £610.1bn.
This could be a contrarian buy
Asset managers like Standard Life Aberdeen are facing pressure on fees from lower-cost index trackers and algorithmic funds. But cost savings are filtering through from the merger that created it last year.
Costs as a percentage of income fell to 69.4% during the half, compared to 70.6% in 2017. Management’s medium-term target of 60% should help to support profits even if fee income does have further to fall.
A second potential attraction is the £1.75bn capital return that’s being planned. It looks like this will be delivered through share buybacks, which I estimate will reduce the group’s share count by 15%-20%, depending on share price movements.
This should provide a significant boost to future earnings per share. Dividend cover by earnings should also improve, helping to secure the stock’s yield of 7.2%.
Standard Life Aberdeen isn’t out of the woods yet. But at current levels, I think this could be a profitable income buy.
An 8% yielder you shouldn’t ignore
Another stock that’s fallen out of favour over the last year is motor and home insurer Direct Line Insurance Group (LSE: DLG).
The big freeze in the UK at the start of this year caused a surge of claims, hitting profits. Weather-related claims for the six-month period totalled £75m, compared to £9m in 2017.
But it’s worth remembering that this is a normal part of the insurance business and claims losses aside, the half-year performance looked quite good to me.
The group’s return on equity remains attractive, at 15.5%. And the number of policies sold directly under the Direct Line brand rose by 4.1% to 7,018. This helped to offset a fall in sales cause by the end of a deal to sell insurance through the Nationwide Building Society.
Bad weather claims totalled £75m during the period, compared to £9m last year. This meant that half-year operating profit fell by 15.7% to £303.1m. But without the extra claims, operating profit would actually have risen.
The right time to buy?
Long-time chief executive Paul Geddes will leave the firm next summer. Mr Geddes has overseen the group’s growth into a FTSE 100 company and is highly regarded by investors, so his departure is a disappointment.
However, I believe he’ll leave a business that’s in good health. Continued strong cash generation means that despite weather losses, analysts expect Direct Line to declare a special dividend this year in addition to its regular payout.
These payments combined are expected to total 27.8p per share, giving a forecast yield of 8.3%. With it trading on 11 times forecast earnings, I believe this could be a good buying opportunity for long-term income investors.
