Should I Buy Old Mutual?

Published in Company Comment on 15 November 2012

Harvey Jones sizes up Old Mutual (LSE: OML).

It's time to go shopping for shares again, but where to start? There are loads of great stocks to choose from, and I've got my wallet out. So here's the question I'm asking right now. Should I buy Old Mutual (LSE: OML)?

Back to the future

Old Mutual isn't the sexiest name in the world. There's that word Old, an awkward term in a world crazy for all things new. And then there's the word Mutual, a sector that slid out of fashion during the privatisation years, and largely remains there.

Put the two words together and what have you got? The creakiest name in the FTSE 100. Positively Victorian, which is fitting, given that Old Mutual was founded in 1845, in South Africa.

Happily, the company isn't feeling its age. It's the third-biggest life company in the UK and the largest in Africa. So should I buy it?

Old Mutual, new frontiers

Old Mutual didn't list until 1999, so in that respect, it's a relative newbie.

Like fellow UK-listed insurer Prudential, Old Mutual gives home-loving investors exposure to emerging markets.

While Prudential is targeting Asia, Old Mutual is making hay on home ground, in the largest untapped market of them all: Africa. The company has a strong presence in South Africa, Botswana and Zimbabwe, it bought Nigerian life insurer Oceanic in February, and is looking to expand into west and east Africa.

If you're looking to explore Africa, Old Mutual lets you do it from the relative security of London's stock exchange.

There has been growing analyst noise about Africa lately. Valuations are low, and the economic outlook increasingly positive. As people become richer, they will have more money to save and invest, and will want to protect that wealth. A good chunk of this business should end up with Old Mutual.

Yes, Africa has been tipped for investor greatness before, and it remains risky, but Old Mutual could be a relatively safe way to play it.

Old Mutual's third-quarter update, published on 7 November, delivered another positive three months. Total funds under management grew 4% to £263 billion for the core group. Meanwhile, sales of life and investment products grew 19% in emerging markets.

Furthermore, the management is cutting back in weary old Europe, closing business operations in Germany and Austria to new business, but expanding in fertile Africa, buying Ecobank in Nigeria for $20 million. Given the outlook for the eurozone, you might think that's a good thing.

The feeling is mutual

Yet management is cautious, pointing to depressed UK savings trends and consumer confidence, and wider economic worries.

Another worry is that the firm's South African earnings are subject to exchange controls, and the political climate in Africa looks set to remain volatile.

A progressive dividend policy always helps, although the stock currently yields just 2.9%, according to Digital Look, and the payout is covered 2.2 times.

Old Mutual's shares are up an impressive 20% since June yet still trade on a modest forecast P/E of 9.7 times earnings for December, so it doesn't look too pricey. Overall, I'm impressed. This old name is one for the future.

Out with the Old

There are certainly fatter dividends to be had elsewhere in the FTSE 100, just ask investment maestro Neil Woodford.

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> Harvey Jones owns shares in Prudential.

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The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

theRealGrinch 15 Nov 2012 , 2:29pm

Do you really understand their brick aka annuals accounts implicitly?

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