Why Standard Life Aberdeen isn’t the only FTSE 100 7% yielder I’d buy to retire on

Roland Head says Standard Life Aberdeen plc (LON:SLA) could be a contrarian buy for FTSE 100 (INDEXFTSE:UKX) investors.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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 assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Standard Life Aberdeen. 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.

More on Investing Articles

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

2 passive income stocks I’m buying before an interest rate cut

With the market expecting interest rates to fall in August, time might be running out for investors looking to buy…

Read more »

Investing Articles

If I’d bought Rolls-Royce shares a year ago, here’s what I’d have now

Rolls-Royce shares have been the big FTSE 100 success story of the past 12 months and more. And there's still…

Read more »

Young female analyst working at her desk in the office
Investing Articles

If the Dow’s heading for 60,000 by 2030, can the FTSE 100 index hit 12,000?

Strategist Ed Yardeni predicts a 50% rise for America’s Dow Jones Industrial Average over six years. Can the FTSE 100…

Read more »

Investing Articles

Is the National Grid share price a once-in-a-decade opportunity?

The National Grid share price looks like a bargain. But there’s much more for investors to think about than a…

Read more »

Investing Articles

Here’s why the Rolls-Royce share price should keep gaining!

The Rolls-Royce share price is up 185% over the past 12 months, but there are a host of tailwinds that…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

Buying 1,852 shares in this ultra-high yield FTSE 100 income stock would give me £1k a year

Harvey Jones is keen to load up on this blue-chip income stock that pays the highest yield on the FTSE…

Read more »