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Saga’s share price just crashed spectacularly. This is what I’d do now

The share price of over-50s insurance group Saga (LSE: SAGA) has crashed spectacularly in the last few days after the group released full-year results on Thursday. Here, I’ll take a look at what’s gone wrong at Saga, and also provide readers with my view on the stock.

Business strategy

What went wrong? Well, put simply, the insurer’s strategy hasn’t worked.

You see, Saga’s strategy revolved around luring in customers with cheap insurance offers and then hiking prices significantly when it came time to renew. But that’s backfired on the group because with the rise of price comparison websites, customers these days often just cancel their policies if they’re told that their renewal price will be 20% to 30% higher than the original price.

Profits have been hit quite badly. For the year ending 31 January, the group reported a loss before tax from continuing operations of £134.6m, compared to a profit of £180.9m last year. The group also lowered its guidance for this year, stating that it expects annual underlying profit before tax of £105m- £120m, compared to £180m last year.

To make matters worse, the group also announced a significant dividend cut last week, slashing its final dividend to 1p per share compared to 6p last year. There are few things that the market hates more than an unexpected dividend cut, so it doesn’t surprise me that the shares were hammered on the news.

So, where to from here? Is the stock a ‘buy’ after falling 40%+?

My take

The last time I covered Saga was in July, around six months after the group released its first profit warning. At the time, I thought that the company may be able to turn things around and I said: “Saga could be a good stock to buy and tuck away for a few years. Growth may be subdued in the short term, yet the company looks well placed to profit from the UK’s ageing population over the long term.”

Looking at recent results though, the outlook for Saga appears to be worse than I thought.

For starters, I don’t like the fact that CEO Lance Batchelor spoke of “long-term challenges” last week. That certainly doesn’t sound good to me. Saga is going to try to turn things around by implementing a new pricing model, but UBS believes there are execution risks associated with this strategy.

Second, the dividend cut also concerns me. You can tell a lot about what management is thinking by looking at the dividend. A dividend cut of this size is worrying.

Third, having spent some time reading forums yesterday, it appears that Saga has a real problem with its reputation. Hiking renewal prices sharply seems to have angered a lot of customers and many don’t trust the company any more, which is a big problem. Moreover, many customers are shareholders too, so they won’t be happy that they’ve lost money on the stock. It could take years to win back the trust of customers. 

What would I do?

If I didn’t own Saga shares, I wouldn’t buy them now. The stock looks too risky, in my view. And if I did own the shares, I’d give serious thought to selling them and moving my money into a company with brighter prospects. I think it could be a while before Saga can turn things around.

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Edward Sheldon has no position in any 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.