Any Takers For A 9% Yield?

Published in Investing on 3 May 2012

Is this 9% yield a reason to buy or a reason to worry?

When a FTSE 100 company is yielding around 9%, it should be ringing a few alarm bells. Something isn't right. On the other hand, a 9% yield may be a great reason to buy the shares, which could gradually re-rate to a more appropriate level if the income is perceived to be sustainable. Such is the question investors must weigh for themselves over RSA Insurance (LSE: RSA).

Big insurers are complex beasts. But I can't see any great reason to be unduly concerned about RSA following Thursday's interim management statement. The overall picture is of a company in a strong and conservatively managed financial position, which is healthily diversified around the globe, with plans to diversify still further.

RSA has a low-risk investment strategy, with 89% of its £14.4bn portfolio invested in high-quality fixed income and cash. Its exposure to peripheral European government debt represents just 1% of the portfolio.

In the first quarter, its net written premiums were up by 5% with all regions delivering good growth whilst its NAV per share is 107p. RSA also expects to deliver good premium growth, with a combined operating ratio of better than 95% for 2012.

Moving away from the UK

The insurer's aim is to generate 70% of its business outside the UK by 2014, up from roughly two-thirds now. The UK remains RSA's single largest market but Canada, Scandinavia, Western Europe and emerging markets are catching up. RSA has been particularly acquisitive in Canada, which now represents close to 20% of premiums.

So any repeat of the potentially transformational £5bn approach for the general insurance business of Aviva (LSE: AV) looks less likely now as RSA has followed a path of many smaller buys overseas, mainly in Canada.

Overall, the brokers expect to see a slight increase in the dividend for 2013 to over 9.7p, with earnings of over 14.1p. So the anticipated yield is over 9% at the little changed price of 105.4p, with a forward price-to-earnings ratio of 7.4. There is a very high degree of consensus around the forecasts. This isn't a huge amount of dividend cover, but the conservative way in which RSA invests and the determination the company will have not to cut the dividend are reason enough for confidence for me.

The share price, meanwhile, continues to suggest RSA will, or may, cut the dividend. Clearly, that's a possibility, but I'm betting the market is wrong.

RSA isn't an exciting share by any means, but its yield most certainly is.

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Further investment opportunities:

> David owns shares in RSA and Aviva.

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Comments

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4spiel 03 May 2012 , 1:02pm

The share price is some disappointment -but we are living in difficult times.Foreign earnings from good countries Canada - Sweden. Recent sterling improvement reduces foreign benefit but at not in Euro !

4spiel 03 May 2012 , 1:06pm

The share price is some disappointment but the foreign earnings are good diversification and with sterling stronger better for not being in Euro.

m00rfield 03 May 2012 , 3:08pm


One could also consider these companies' preference shares instead - RSAB current yield 7.1% and AV.A 7.9%. For that you get a cumulative dividend which is paid out before the ordinaries get theirs.

4spiel 03 May 2012 , 3:23pm

The RSAB I think are a nice granny hold bought at the right stage of the % rate cycle but not now unless you are an absolute bear that see Prefs bunched up eventually at the ridiculous levels of BP.9%. RSAB are worth 80-85p no more. The value is potentially in the common stock . If you really like the RSAB they are OK over full cycle. but you may experience a capital loss when % rates rise when it would be inconvenient to sell. I added to ordinary RSA today. Lovely company and global.

UncleEbenezer 03 May 2012 , 3:35pm

I hold RSAB, bought halfway between 4spiel's price and today's price.

Thinking about the ordinaries, but in no hurry. When a share has drifted downwards like this one over the years (in contrast to sector peers like the Pru), I'd like to have a much better feel for what's really going on.

Hannibalis 03 May 2012 , 6:20pm

Yes, I like as well - I'm not sure where the uncertainty about the dividend comes from? I agree with David that it is probably OK, and when the price increases the yield will return nearer to general market levels. But clearly something is spooking the institutional investors - maybe the failure to bag a big takeover?.
http://www.the-diy-income-investor.com/2012/02/portfolio-buy-rsa-group-lsersa.html

AleisterCrowley 04 May 2012 , 12:38pm

4spiel- can you explain ?
The RSAB I think are a nice granny hold bought at the right stage of the % rate cycle but not now unless you are an absolute bear that see Prefs bunched up eventually at the ridiculous levels of BP.9%

Genuine question - I'm researching Prefs and PIBS at the moment

max22222 05 May 2012 , 10:23pm

AleisterCrowley - When base rates are low it's a bad time to buy fixed interest stocks because when inflation and base rates rise so does the running yield on fixed interest stocks resulting in capital decline and inflation eating away at the capital and interest at an increased rate.

Buy fixed interest stocks when interest rates are at their height.

Given the emergency low levels of base rates and the quantity of gilts purchased under QE it could be argued that fixed interest stocks are in bubble territory.

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