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Could a 7.6% yield help the Saga share price return to 200p?

Almost one year ago, over-50s insurance and travel group Saga (LSE: SAGA) issued a profit warning which triggered a 30% share price crash.

Profit warnings often come in threes. But, so far, the firm has avoided further problems and has delivered results in line with its revised guidance.

Despite this, Saga’s share price remains close to its 52-week low. Today, I’m going to ask whether the stock’s forecast dividend yield of 7.6%, and stable outlook, are enough to make the shares a turnaround buy.

Peak performance?

I’ll come back to Saga in a moment. But first I want to take a quick look at another FTSE 250 insurance firm, Hiscox (LSE: HSX).

Hiscox has two main arms. One part of its business offers specialist commercial insurance against threats such as natural disasters and cyberterrorism. The other operates a retail business providing services such as motor and home insurance.

Shares in the group are down by 6% at the time of writing, despite gross written premiums received rising by 14.3% to $3,043.1m during the first nine months of 2018.

The fall came after chief executive Bronek Masojada warned that premium growth was likely to slow during the remainder of the year. Masojada also flagged up a $125m claims bill for damage caused by recent storms in the US and Asia.

My verdict

I’ve been a fan of Hiscox for some time. But the group’s share price has continued to rise since I last covered the stock. And the stock’s 2018 forecast price/earnings ratio of 20, and dividend yield of 2%, aren’t cheap enough to tempt me to buy.

With interest rates rising, I’d be looking for an entry price of under 1,200p.

The problem with Saga

Getting back to Saga, you may be wondering why I haven’t bought the shares already. After all, a covered yield of 7.6% isn’t to be sniffed at.

One reason why I haven’t hit the buy button is that I already have two other insurance stocks in my portfolio. I don’t want my investments to be too concentrated in just one sector.

Another reason is that Saga appears to be struggling to generate any growth. Underlying pre-tax profit fell by 3.7% to £106.8m during the first half of the year. And although net debt fell by 6.7% to £429.7m, highlighting the group’s cash generation, policy numbers in its core insurance business were unchanged from the same period last year.

Can the shares return to 200p?

Chief executive Lance Batchelor expects Saga’s bottom line to benefit from lower costs and a growing number of customers purchasing multiple products. He’s also optimistic that the firm’s new cruise ship, Spirit of Discovery, will help expand its travel business.

I’m tempted by the firm’s focus on over-50s, many of whom have relatively high levels of disposable income. However, analysts expect Saga’s underlying earnings to fall by 4% to 13.2p per share this year. The total dividend is expected to be unchanged, at 9p per share.

Forecasts for 2019/20 are fairly similar. With no growth on the horizon, I’d suggest that the firm’s shares are correctly priced at about 120p.

However, if Batchelor can restart the group’s growth, then I’d expect the share price to respond well. In that scenario, a share price of 150p-200p would seem fair to me.

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Roland Head 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.