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RSA Insurance Group plc Will Be A Buy

RSAThere’s no doubt that investors in RSA Insurance (LSE: RSA) (NASDAQOTH: RSANY.US) are cheering the appointment of Stephen Hester as its new CEO. The shares leapt 6% on the news, whilst the Financial Times quoted a top 20 shareholder as saying “He’s a bigger name than we’d hope to get”. Mr Hester has a track record in turning around struggling companies, most recently at state-owned RBS where he made great progress before falling foul of political agendas.

Kitchen sink

But shareholders should brace themselves for plenty of bad news. It’s an established trend, if anything becoming more marked, for incoming CEOs to ‘kitchen sink’ all the bad news within their first few months of office. There will be lots of provisions announced with RSA’s results later this month, the inevitable strategic review, and considerable uncertainty for 12 months or so.

I would be hesitant to plunge into the share price rally just yet. Mr Hester should be good for the shares in the long run, but a stream of bad news is likely to cause short-term volatility. The real significance is that having secured someone of Mr Hester’s calibre and reputation, RSA’s shareholders can expect a bolder and more far-reaching solution than if they had a more run-of-the-mill CEO. Indeed, the plaudits that have greeted Mr Hester’s appointment might well embolden him to radical action.

Dividend cut or rights issue?

That means a cut to RSA’s dividend is now more likely — a weaker CEO might have feared the likely share price impact and the possibility of attracting a low-ball bid. Similarly, a rights issue is now more on the cards than before. RSA must shore up its capital and analysts have suggested the company should sell some of its overseas crown jewels. Judging by his reluctance to shrink RBS’s investment bank and US operations — at least precipitously — Mr Hester is more likely to raise capital from the market than by selling core businesses.

Longer term, there is still a question of whether RSA makes sense as a disparate group of national insurance companies, opportunistically in markets where the competitive environment is attractive (other than the over-crowded home UK market). The appointment of Mr Hester might herald the end of the company’s independence — but at a far better price than shareholders could currently expect.

Prospects

The general insurance sector is one that pays high dividends but they are far from the most reliable, so investors must be cautious when assessing their prospects. Nevertheless, investing in dividend-paying stocks is great way to boost your wealth and/or your income. Over the past 25 years, about 60% of the total return from the FTSE All share Index has come from reinvested dividends.

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 > Tony does not own any shares mentioned in this article.