Should I Buy Resolution Limited?

I’m out shopping for shares again. Should I add Resolution (LSE: RSL) to my list?

When I examined Resolution just before Christmas last year, I said this was one New Year’s resolution I wouldn’t be making. My NY resolutions usually turn out to be rubbish, however, and this was no different. Resolution’s share price is up 30% since then, against just 10% for the FTSE 100 as a whole. I should have bought it last December, but should I buy it today?

Guernsey-registered Resolution, founded in 2008 by insurance entrepreneur Clive Cowdery, has risen a resolute 50% in the last 12 months, against 13% for the index. Its recent half-year results showed “strong financial performance and improving cash generation”, including an eye-catching 17% rise in operating pre-tax profit to £191m. Its new UK business grew 41% to £89m (although international business was flat at £21m), and it also squeezed out £154m worth of cost savings. Resolution put this down to its clear strategy “with a focus on delivering cash generation today, profitable new business and securing cash generation for the future”. 

9.43% yield

Last December, Resolution was dogged by worries about integrating AXA into its Friends Life business and the impact of the UK regulatory overhaul, the Retail Distribution Review. Cowdery’s attempts to consolidate the UK life insurance industry, which he felt had too many medium-sized, underperforming companies, appeared to have floundered. But with the business now “well placed to take advantage of key demographic and regulatory trends”, the future looks brighter.

What really caught my eye last year was its dividend yield of 9.43%, the largest on the FTSE 100 at the time. It is still the largest on the index, although recent share price growth has trimmed that to 6.65%. It is still well ahead of second-placed AstraZeneca at 5.79% and fellow insurers Aviva (4.86%) and Prudential (2.6%). Management recently held the interim dividend at 7.05p per share, but it should be well protected, given the insurer’s strong capital base and healthy cash generation.

Sticking to my guns

Resolution offers both income and growth prospects, but it isn’t that cheap. Trading at 16 times earnings, it is more expensive than mighty Prudential, which trades at 14.6 times earnings. Earnings per share (EPS) growth appears to justify that at a forecast 18% in 2013 and 12% in 2014. But my enthusiasm is tempered by broker caution, with Citigroup and JP Morgan both neutral on the stock. I’m in no rush to buy Resolution today, but then, didn’t I say that last year…?

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> Harvey owns shares in Aviva and Prudential. He doesn’t own any other company mentioned in this article