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Why Standard Life Aberdeen isn’t the only FTSE 100 7% yielder I’d buy to retire on

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Shares of Standard Life Aberdeen (LSE: SLA) rose by 3% in early trade this morning, after the asset manager announced plans to return £1.75bn to shareholders following the sale of its life insurance business.

Unfortunately, other figures in today’s half-year results weren’t quite so impressive. Excluding the life insurance business, which is being sold to specialist insurer Phoenix Group, adjusted pre-tax profit was £311m. That’s 12% lower than for the same period last year.

The main problem facing the firm is that investors are continuing to withdraw their cash from its funds. Although the group saw £38bn of inflows during the first half, these were outweighed by outflows of £54.6bn. As a result, assets under management and administration fell by £16.6bn to £610.1bn.

This could be a contrarian buy

Asset managers like Standard Life Aberdeen are facing pressure on fees from lower-cost index trackers and algorithmic funds. But cost savings are filtering through from the merger that created it last year.

Costs as a percentage of income fell to 69.4% during the half, compared to 70.6% in 2017. Management’s medium-term target of 60% should help to support profits even if fee income does have further to fall.

A second potential attraction is the £1.75bn capital return that’s being planned. It looks like this will be delivered through share buybacks, which I estimate will reduce the group’s share count by 15%-20%, depending on share price movements.

This should provide a significant boost to future earnings per share. Dividend cover by earnings should also improve, helping to secure the stock’s yield of 7.2%.

Standard Life Aberdeen isn’t out of the woods yet. But at current levels, I think this could be a profitable income buy.

An 8% yielder you shouldn’t ignore

Another stock that’s fallen out of favour over the last year is motor and home insurer Direct Line Insurance Group (LSE: DLG).

The big freeze in the UK at the start of this year caused a surge of claims, hitting profits. Weather-related claims for the six-month period totalled £75m, compared to £9m in 2017.

But it’s worth remembering that this is a normal part of the insurance business and claims losses aside, the half-year performance looked quite good to me.

The group’s return on equity remains attractive, at 15.5%. And the number of policies sold directly under the Direct Line brand rose by 4.1% to 7,018. This helped to offset a fall in sales cause by the end of a deal to sell insurance through the Nationwide Building Society.

Bad weather claims totalled £75m during the period, compared to £9m last year. This meant that half-year operating profit fell by 15.7% to £303.1m. But without the extra claims, operating profit would actually have risen.

The right time to buy?

Long-time chief executive Paul Geddes will leave the firm next summer. Mr Geddes has overseen the group’s growth into a FTSE 100 company and is highly regarded by investors, so his departure is a disappointment.

However, I believe he’ll leave a business that’s in good health. Continued strong cash generation means that despite weather losses, analysts expect Direct Line to declare a special dividend this year in addition to its regular payout.

These payments combined are expected to total 27.8p per share, giving a forecast yield of 8.3%. With it trading on 11 times forecast earnings, I believe this could be a good buying opportunity for long-term income investors.

Buy-And-Hold Investing

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Standard Life Aberdeen. 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.