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Does the Chesnara share price offer good value at current levels?

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I’m always on the lookout for good quality companies that could be worth an investment. Although I mostly focus on stocks in the FTSE 100, there are smaller companies that can fly under the radar. For example, the Chesnara (LSE:CSN) share price has caught my attention. The FTSE All Share stock is up almost 3% today. So should I consider investing now?

Backstory 

Chesnara is a life insurance company, servicing around 0.9m policies in the UK and around Europe. Its largest market is actually Sweden, where it currently has 365,000 policies. 

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Like other companies in the industry, Chesnara operates a business model that generates high cash flow and cash retention. In the 2020 results, the group solvency ratio was an impressive 156%. Aside from having liquid assets for solvency, it uses the funds to pay out to shareholders in the form of dividends. This is one reason why I think the Chesnara share price appeals to some, as income investors buy the stock for dividends.

Chesnara defines the change in cash generation as “the movement in the group’s surplus own funds above the group’s internally required capital.” To this end, it measures the growth over time. Over the past five years, it’s grown 152%. 

For 2020, it paid out a dividend of 21.9p per share. With the Chesnara share price currently trading around 268p, this gives a dividend yield of 8%. When I consider that the FTSE 100 average dividend yield is around 3%, this is very attractive.

Is there value in the Chesnara share price?

As an income investor, I’d say there is good value to be had. To be able to buy the stock when it offers a dividend yield in excess of 8% is something that appeals to me. 

The company also has grown the dividend per share for the past 16 years, so I feel this is a sustainable yield going forward.

However, the Chesnara share price could be a value trap when I look at historical share price performance. The shares are down just over 5% over the past year. Two years ago shares were trading at 353p, meaning that I’d be down over 33% if I’d bought shares then. So even with a healthy dividend yield, I’d still be in the red overall over this time period due to the falling share price.

What has caused the falling share price? The pandemic clearly negatively impacted business. Pre-tax profits in 2020 were down to £24.6m from £96.1m in 2019. Given that the results ran through to the end of the calendar year, I’d expect 2021 full-year results also to be impacted.

Another reason for concern is the fact that the company uses Asset Liability Matching (ALM) for its insurance. This aims to cover the future liabilities due by investing in low risk assets (such as bonds). However, with interest rates and bond yields falling, the return on these assets is unlikely to be particularly high.

After looking into it, I’m deciding against investing in Chesnara shares. I appreciate the dividend yield is good, but the risk of having my income more than eroded by a falling share price is too high at present.

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Jonathan Smith has no position in any share mentioned. The Motley Fool UK has recommended Chesnara. 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.

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