Insurance companies have great potential to provide decades of solid dividend streams. The downside is that the business can be cyclical, and sometimes dividends need to be cut — and we saw a handful of insurers getting overstretched during the financial crisis and having to slash their payments.
But with a long-term strategy of reinvesting dividends rather than spending the cash, that should not really pose a problem. I currently hold Aviva shares myself, but I’ve also long liked the look of others like RSA Insurance and Standard Life.
Asset management
I like fund managers too. Not the idea of handing over any of my cash for others to manage, because there’s an inevitable conflict of interest, but buying shares in them. On that score I’ve been a fan of Aberdeen Asset Management for some time, and I reckoned the merger with Standard Life to form Standard Life Aberdeen was a good deal for both sets of shareholders.
But looking back over the past year, you could be forgiven for thinking that the whole thing has gone badly wrong, with the shares down 38%. So what’s up?
Rupert Hargreaves recently cast a critical eye over the company, and one thing he points out is that it returned a chunk of capital to shareholders after the sale of its UK and European insurance business, to the tune of 34p per share. There was a share consolidation too, which makes comparisons difficult. But even considering that, investors have still seen their holdings fall significantly in value.
Weak performance
There have been performance issues from both Standard Life Aberdeen itself and the insurance sector generally, but what confuses me most as an observer is trying to understand the company’s current focus — as Rupert points out, it has changed in ways that seem contradictory to its stated aims. I find it hard to see what’s left of the previous two companies, both of which I admired — and that’s left me in a position of not really understanding the company when I so recently thought I did.
Uncertainty is a big killer of confidence, and it must weigh heavily on the minds of the institutional investors who have increasingly shied away from Standard Life Aberdeen. They are, after all, constantly being evaluated on their investments at quarterly intervals, and they don’t like being seen to be holding losers.
But that’s where we private investors hold the advantage, in that we’re not answerable for our performance to anyone but ourselves. So is the current uncertainty surrounding Standard Life Aberdeen a buying opportunity for us? I think it is.
Big dividend
Forecast dividend yields now stand at 8.5%, but barely covered by earnings, so I think we’ll need to see how the company comes out of its transition period before we can get a good grip on its long-term dividend strategy.
But at the same time, were looking at a forecast P/E of a relatively low 10.6. I do see better bargains out there, and I still prefer the look of Aviva on a P/E of only seven and with well-covered forecast dividend yields of more than 7%.
But I do see the long-term prospects for Standard Life Aberdeen as being positive.
