Should I Buy Resolution?

Published in Company Comment on 6 December 2012

Harvey Jones sizes up Resolution (LSE: RSL).

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 Resolution (LSE: RSL)?

New Year's Resolution

Anybody who loves a good yield will have already checked out Resolution. It's the highest yielding stock on the FTSE 100 (UKX), currently dishing out a stonking 9.43%, comfortably ahead of RSA Insurance Group (LSE: RSA) in second place, which yields 8.5%. It's a crazy yield, almost 19 times base rate. But does a crazy yield mean a crazy company? Let's see.

Friends for Life

Guernsey-registered Resolution was founded in 2008 by entrepreneur Clive Cowdery with a bold and single-minded aim. He wanted to force consolidation in the UK life insurance industry, buying at least three underperforming insurers to generate cost savings and spin out the company on the stock market. Resolution bought Friends Provident in 2009 and took its place in the FTSE 100. In 2010, it snapped up AXA's UK savings and life assurance arm and Bupa's life, critical illness and income protection business, bringing them together under the label Friends Life Group.

Cash cowed

Resolution's shares performed strongly last year, pleasing shareholders by returning £500 million in share buybacks, after claiming there were no further acquisitions worth pursuing. Speculation that Resolution may change its nature -- from being the acquirer to the acquired -- didn't harm the share price, either. But Resolution has faltered this year, with a string of management changes, and growing concerns that what was supposed to be a cash cow for investors is running dry. The planned lucrative exit from what is now labelled the UK Life Project looks like being kicked further down the road.

Circle of Life

Since the launch, Resolution has been dogged by criticisms over the structure of the business, which is registered offshore to reduce tax exposure. It has even been threatened with losing its premium FTSE 100 listing, which would force many investors to automatically sell. Its Q3 results, published in November, revealed more bad news, as integrating AXA into its business has been more difficult and expensive than anticipated. Resolution has also been hit by a number of broker downgrades. UBS cut its rating from 'buy' to 'neutral', blaming "disappointing nine-month trading, EV write-downs, UK restructuring charges, and recent share-price performance", which made the valuation less compelling. Investec confirmed Resolution as a 'sell' on concerns over the cost of integrating AXA and lack of news on the proposed revised corporate structure. Nomura stuck to its 'reduce' rating, due to Resolution's unattractive valuation and prospects, and disappointing international performance. Brokers say the FSA regulatory overhaul, the Retail Distribution Review, will only add to the uncertainty surrounding the UK Life Project.

Resolution failed

It isn't all bad news. New business increased to £138 million in the first nine months of 2012, up from £95 million in the same period last year. The group's capital position is "robust" and Resolution has minimal exposure to high-risk sovereign debt. And then, of course, there is that whopping yield. It pains me to turn down 9.43% a year these days, but this is one resolution I won't be making in the New Year.

Resolve to download this

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> Harvey doesn't own any shares mentioned in this article.

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ChancieGardener 06 Dec 2012 , 12:54pm

Thanks for that very interesting article. I have had Resolution on my watch list since it dipped below 200p (now 244p) but I was always a bit wary'.

Another high yielder, in the Insurance "game", that I did buy is Chesnara (CSN) which pays an equally good 9% dividend. It was as low as 155p earlier in the year (now 194p) and I like the cut of it's jib!

Foolishly yours'

gadjet2 06 Dec 2012 , 6:00pm

I bought Resolution in May at about 200, having been seduced by the high dividend and without doing enough research! At the end of October, having received the dividend and worried by all the adverse "noise" I sold at 218. Profit about 12%. If I had it to sell now, profit would be about 25%
Before reading the above article I was annoyed about having sold, so I'm feeling better now I've read Harvey's reasoning.

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