With Old Mutual’s (LSE: OML) break up plans having brought insurers and asset managers back into the spotlight for the day I thought I would take this morning to look at the future prospects of some of London’s heavyweight insurers and asset managers.
Reasonable store of value
The last few quarters have been less than kind to Old Mutual shares, with shareholder returns failing to meet investor expectations in 2014 and throughout much of 2015. This followed a period where, according to management, the complex structure of the group has lead investors to persistently under-value the shares, prompting the announcement of a break up of the company this morning.
The ‘Managed Separation Plan’ will see Old Mutual reduce its majority stakes in publicly traded Nedbank and OM Asset Management, with management also considering a possible flotation of the wealth management and emerging markets businesses as well.
A mixed reaction from the market and a lack of detail makes forecasting difficult at present, although the Morningstar consensus still implies modest earnings growth ahead and that dividends will remain above 9.5 p per share (a yield of 5%) through to 2018.
When taking into account a ‘lower for longer’ interest rate environment and the prospect of additional capital returns as the break-up progresses, in addition to an unconstrained balance sheet and the recent under-performance of the shares, Old Mutual could still prove a reasonable store of value for investors.
A riskier prospect
With the bottom having fallen out of the UK annuities market during 2015, a subsequent raft of downgrades to earnings projections in the broking world have driven Standard Life (LSE: SL) shares back to 2012 levels, bringing losses so far in 2016 to 7.29%.
The shares are projected to offer a dividend yield of 5.5% in 2016 and the balance sheet remains in good health. However, dividend cover at just 1.3x is low, while further rate increases from the Federal Reserve could mean that Standard Life experiences some losses in the longer-dated bond portfolios that comprise a meaningful portion of assets under management for the life business.
This means that the shares probably aren’t the greatest idea for risk averse investors although, if the group is able to throw sand into the eyes of doubters when it releases first half results in August, investors could benefit from capital appreciation as the shares begin to recover lost ground.
Positioning for growth
St James’s Place (LSE: STJ) has performed strongly since the financial crisis, with the shares up more than 500% in the years since, as strong growth in assets under management and stable margins have driven a consistent expansion of earnings during recent years.
St James’s has been investing considerably in an international expansion for some time now, with emerging markets such as Hong Kong and Singapore now providing attractive growth opportunities for the future.
Looking ahead St James’s Place should continue to benefit from ‘lower for longer’ interest rates and the consequent demand for its services among private investors, given the sub-par returns available from traditional assets such as cash and simple fixed income securities.
The shares are down so far this year, like many others in the wealth management arena, while dividend cover is hovering around the 1.0x level according to the Morningstar consensus for earnings per share and dividends per share over the next two years.
This means that the shares could be risky for those who value a stable income stream. But a reasonable outlook for earnings growth could still bode well for capital appreciation over the coming quarters.