For most shares in the FTSE 100, 2013 was a good year and investors have likely enjoyed capital gains and rising dividend income.
That makes me nervous about investing for 2014 and beyond, and I’m going to work hard to adhere to the first tenet of money management: preserve capital.
To help me avoid losses whilst pursuing gains, I’m examining companies from three important angles:
- Prospects;
- Risks;
- Valuation.
Today, I’m looking at general insurer RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSANY.US).
Track record
With the shares at 99p, RSA Inurance’s market cap. is £3,650 million.
This table summarises the firm’s recent financial record:
| Year to December | 2008 | 2009 | 2010 | 2011 | 2012 |
|---|---|---|---|---|---|
| Revenue (£m) | 7,273 | 7,744 | 8,448 | 9,131 | 9,397 |
| Net cash from operations (£m) | 527 | 301 | 296 | 303 | 303 |
| Adjusted earnings per share | 17.3p | 12.2p | 9.8p | 11.9p | 9.5p |
| Dividend per share | 7.71p | 8.25p | 8.82p | 9.16p | 7.31p |
1) Prospects
When I last wrote about RSA Insurance back in November, I wondered if the firm’s emerging problems in Ireland presented investors with a contrarian buying opportunity or whether the company’s challenges would endure. Back then, the shares were around 105p, since when they’ve moved down to about 90p, and now sit at around 99p. Given recent general market weakness, the bounce in RSA’s share price certainly suggests the consensus opinion is that RSA’s business is set to recover from here.
Following the recent resignation of RSA’s long-serving CEO, the newly appointed Executive Chairman, Martin Scicluna, has itemised what’s needed to set the firm on the road to recovery. Finding a replacement CEO is top of the list, followed closely by the need to strengthen the balance sheet, which sounds like a threat to the forward dividend at the very least and possibly, in a worst-case scenario, the first noises leading towards some kind of fund raising. After that, there’s the usual talk of streamlining the business that’s so often heard around turnaround situations like this.
As well as the firm’s well-reported difficulties in its Irish arm, extreme weather events have been costing the firm dearly in claims for a while. Yet even that may not be the whole story at RSA. If you look at the five-year financial record in the table, you’ll see that dividend cover from earnings has been weakening. In fact, even before we knew about the Ireland problem RSA cut the dividend by 33% last year at the interim stage. So, it seems to me that the problems could indeed be more enduring than recent events might suggest. That inclines me to caution with regard to the outlook for 2014 and beyond.
That said, the outlook doesn’t get any better than this if you want to make money from turnarounds. The time to invest for the largest gain is when things look bleakest, but when long-sited observers glimpse the first green shoot on some distant mountain top.
2) Risks
RSA’s turnaround is not assured. The dividend seems threatened, which could mean that one traditional investor-safety-net might not be available.
Then there’s the cyclicality of the industry to consider, and the fact that the fortunes of financial-type firms like RSA tend to move with general financial markets.
3) Valuation
City analysts are forecasting an earnings rebound during 2014 settling down to 8% earnings’ growth in 2015. The forward P/E rating is running at about eight. They’re also predicting a healthy forward dividend yield but given the speculation about possible dividend cutting ahead, and the unknown extent of the firm’s restructuring requirements, I think we should treat all predictions with scepticism.
What now?
RSA has struggled with profitability and cash flow in recent years. Current events have brought matters to a head and now the firm looks attractive for its turnaround potential. However, I’m not too keen on the insurance sector because, for me, it lacks earnings’ visibility.
