The Motley Fool

Does absurdly cheap Saga’s whopping 7% dividend make it an unmissable buy?

Image source: Getty Images.

These are challenging times for over-50s travel and insurance specialist Saga (LSE: SAGA). And the initial market response to today’s interims was disappointing with its share price dipping as it reported a 3.7% drop in underlying pre-tax profit to £106.8m.

Tough times

Tougher pricing in the insurance market saw revenues fall 1.7% to £430.6m in the six months to 31 July. Yet the results also contain more promising figures, with many investors tempted by its storming dividend yield, currently a forecast 7.1%. So is this falling knife worth catching?

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

That drop in underlying profits reflected a number of factors, including planned investment in new business and improved retention in insurance, both worth spending money on. Saga also spent more on new business acquisition, again, a good thing, although worryingly, this was to offset “a challenging insurance market.” 

Cash flows

There was good news too, including sustained strong cash generation of £89.5m, with operating cash conversion rising to 67.2%. Customer numbers climbed back to H1 2017 levels, driven by a 19% increase in new motor and home business.

Saga cut operating expenses across its travel and insurance businesses, with administrative and selling expenses falling from £126.3m to £120m. The £1.38bn FTSE 250 company also boasts “industry leading levels of multiple product holdings,” with 44% of customers owning more than one product. Its exclusive membership programme, Possibilities, which offers “VIP experiences, incredible events and great offers,” and has up to 850,000 members.

Free Spirits

Group CEO Lance Batchelor claims “significant progress” in its stated aim of boosting new customer acquisition, despite a more competitive pricing landscape. Underwriting results and claims management are strong.

He also reported “encouraging demand” for Saga’s new ship, Spirit of Discovery, which should make her maiden cruise next year. Operating expenses are now lower across the business, which Batchelor said reflects a more efficient operating structure and investment in its IT systems.

Brand power

Saga’s big advantage is that it has a clear customer target base, the over 50s, and a relatively loyal one. However, management also knows that in a competitive, price-driven, increasingly net-based retail world, loyalty is not the force it was.

The car insurance market is particularly competitive, with price comparison sites constantly urging motorists to save hundreds of pounds by switching at renewal time. Motor premiums have actually fallen over the last year, so maybe the urge to switch will not be quite as strong, and Saga still retains plenty of brand appeal for those who do not buy purely on price.

Income hero

As Batchelor points out, the business remains highly cash generative, which allows it to pay an interim dividend of 3p. That forecast 7.1% yield could therefore be less precarious than it appears, with cover of 1.5. Saga also looks nicely valued, trading at a forecast 9.8 times earnings following its recent 35% share price drop.

Growth could be hard to come by, and City analysts are still forecasting a 5% drop in earnings per share in the year to 31 January, then just 2% growth the year after as revenues dip. That dividend still looks sorely tempting, though.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

harveyj has no position in any of the shares mentioned. 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.