One turnaround dividend stock I’d buy today, and one I’d sell

After today’s results from emerging markets bank Standard Chartered (LSE: STAN), I’m considering buying more shares to add to my existing holding.

The shares have fallen by 4%, but the figures suggest to me that the group’s turnaround is gathering pace. Underlying income rose by 6% to $7.2bn during the first half of the year. Pre-tax profit of $1.8bn was 82% higher than for the same period last year.

One slight disappointment is that there will be no interim dividend in 2017. The board will decide later this year whether to reinstate the final dividend. Analysts’ consensus forecasts are for a payout of $0.19 per share, so there is some scope for disappointment if profits don’t support a payout.

Stronger but still cheap?

Standard Chartered’s underlying return on equity rose to 5.2% during the first half, up from 2.1% in the same period last year. Although this is still well below the group’s target of 10%, it certainly seems to represent good progress.

There was also some good news on bad loans. The bank’s underlying impairment charge on bad debts fell by 47% to $583m. This suggests to me that existing bad loans are being well managed, and that newer lending is of better quality.

There was nothing in today’s figures to change my view that this turnaround story is making good progress. Although the stock has risen by 22% so far this year, I believe it remains affordable. StanChart’s current share price of 809p puts the stock at a 14% discount to its tangible net asset value of 940p per share. I think further gains are likely from here.

This turnaround has arrived

Another stock which fell when markets opened this morning was RSA Insurance Group (LSE: RSA). Shares in the firm formerly known as Royal Sun Alliance fell by about 3%, even though today’s half-year results were good.

Group operating profit rose by 15% to £360m, while underlying earnings per share for the six months to 30 June rose by 31% to 23.3p. This puts the group nicely on track to deliver consensus forecast earnings of 43.1p for the full year.

There was also good news for income investors. RSA’s interim dividend will be increased by 32% to 6.6p. That’s in line with forecasts for a full-year hike of 36% to 21.8p.

Based on current broker forecasts for 2017, RSA stock trades on a forecast P/E of 15 with a prospective yield of 3.3%. Further growth is expected to improve these figures in 2018 to give a P/E of 12.8, and a yield of 4.1%.

This valuation seems about right to me, for a large insurer. So what should shareholders do now?

For income investors, I think it makes sense to sit tight and benefit from the company’s growing supply of spare cash.

But if your investment in RSA was based on the group’s turnaround potential, I might consider taking some profits. The group’s stock has risen by 65% from the low of 389p seen in February last year. Today’s statement confirmed that “restructuring is now complete” and that the group’s focus is on “the drive for outperformance”.

In my view, this means we’re back to business as usual. Further gains may well be likely, but I think the stock is now fairly valued.

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Roland Head owns shares of Standard Chartered. The Motley Fool UK has no position in any of the shares mentioned. 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.