The Standard Life Aberdeen (LSE: SLA) share price has been on a rip lately, climbing 30% since the middle of August. That did come after a precipitous slump from a high point just three weeks earlier, mind, making it possibly the most volatile share on the FTSE 100 right now.
The mixed feelings shown by the market these days seems to stem from the merger of the old Standard Life with Aberdeen Asset Management in 2017, though both individual companies were regularly among my own favourites.
A problem I have right now is that the complexity of the current business makes it very difficult to get a feeling for its long-term value, and that’s something my colleague Rupert Hargreaves has examined in some detail recently.
Mixed
What I think I’m seeing is a mix of enthusiasm for the company’s ambitious new directions, tempered by a down-to-earth concern about the reality of its nuts-and-bolts legacy business – and the latter is something that shared by Rupert.
Some investors will no doubt be tempted by the juicy 7% dividend yield on offer, but I harbour a feeling that that’s perhaps a legacy thing too, with payments actually having dipped slightly since 2017. On current forecasts, the 2019 and 2020 dividends wouldn’t be covered by earnings, and I do wonder if a rebased dividend strategy would be more in keeping with the company’s new expansion and diversification direction.
I’m just not seeing enough of a safety factor to compensate for a forward price-to-earnings ratio of 17, so I’m keeping away for now and just continuing to watch.
Better value?
Looking at RSA Insurance (LSE: RSA) strengthens my feeling, and in that company I think I’m seeing the opposite – a steady business just carrying on with what it’s been doing for years, and offering good value.
I’ve owned RSA shares at various times in the past, in line with the various cycles its valuation has gone through, and I can’t help feeling the upbeat forecasts for this year and next are indicative of an oversold stock. Earnings did drop in 2018, but predicted earnings per share growth of 16% this year followed by 18% next could put the company back on a solid growth trajectory.
RSA’s dividend has been progressive in recent years, but it hasn’t looked too stretched, and even with last year’s earnings dip, we still saw cover of around 1.6 times. Analysts are predicting double-digit percentage uplifts in the dividend for both 2019 and 2020, but that would still keep cover above 1.6 times and rising.
Update
RSA’s Q3 update a week ago, which showed an improvement in underwriting profits, gave the shares a small boost, but the price is still down 11% over the past two years. With dividend yields coming in close to the FTSE 100’s average at the moment, RSA shares have been falling behind the index, but I think the market has got this one wrong.
The outlook suggests a P/E of a little under 14, and that would drop to only around 11.7 by 2020 should forecasts prove accurate. I think that represents a better investment prospect than Standard Life Aberdeen, especially as I don’t foresee any pressure on RSA’s dividend. RSA is on my shortlist.
