Our latest research 28/4/2014

DividendMax write up 28/4/2014

This time we are going to take a look at the insurance industry which is the highest yielding sector in the market. We will look at the life companies and the general insurers (some of them do both) and the underwriters / Lloyds of London. Our initial criteria is for all yield, all market cap, all dividend cover, any CADI, a positive FDI and sector ‘life insurance’. We will repeat this selection for ‘non-life insurance. The selection yields 11 companies in the life insurance sector and 10 companies in the non-life sector. The long list is Phoenix group holdings, Hansard Global, Resolution Limited, Chesnara, Legal & General, Standard Life, Old mutual, St James’s place, RSA, Aviva, and Prudential from the life sector and Admiral, Catlin, Amlin, Direct line, eSure, Novae Group, Beazley, Hiscox, Jardine Lloyd Thompson and Lancashire holdings.

The insurance sector has come under severe pressure in recent times. The empowering move by the government over pensions will hit the lucrative business of providing annuities. Meanwhile underwriters and motor insurance firms have been hit by floods and heavy competition respectively.

Now that we have the full list covered by DividendMax, we should look at whittling it down and in our view the most important criteria here will be the CADI so we will look for consistency of dividend payments by selecting a CADI greater than 5 years. This reduces the non-life list to Admiral, Catlin, Novae, Beazley, Hiscox and Jardine Lloyd Thompson. The life sector gets hammered and the list becomes Chesnara, Standard Life and Prudential. Next, we consider the yield and Prudential is far too low and is eliminated. This is also the case in the non-life sector as the yields from Hiscox and Jardine Lloyd look too low.

Looking at the fundamentals of the remaining companies we have:

We are going to eliminate Chesnara on the grounds of the high P/E and the fact that it went ex-dividend earlier this month. We loved it about two years ago when it was top of the Optimizer yielding well over 10%. We bought it for the trading portfolio on 17^th February 2012 and again on 22^nd February at 175 and 166p respectively. At 338p today having hit a high of 363p, they look well up with events. We always say that anything yielding over 10% on the optimizer is a good proposition unless there is a strong prospect of a reduction in the dividend.

Standard Life went ex-dividend at the same time as Chesnara and also look expensive. Frankly, I am pretty pleased that none of the life companies got through because I think the annuity thing is a big unknown right now.

Before we investigate further we will have a look at what the brokers are saying about our survivors:

So, we are left with four non-life companies

We see having an insurer in your portfolio as essential and we would like to pick one out for DividendMax subscribers.

Firstly, lets remind ourselves of the dividend histories of our four survivors. Let’s have a look at the dividends paid by each company over the past 6/7 years:

Admiral

*they have declared a final dividend of 50.6p for 2013 going ex on 30^th April 2014. Admiral always pay a normal and special dividend at the same time and so we treat them as a single dividend.

Catlin

Novai

*They also paid a 20p special dividend in 2013

Beazley

*they also paid special dividends of 2.5p, 8.4p and 16.1p in 2010, 2012 and 2013 respectively.

Four track records that show why the current rating of the insurance sector is not really justified. There is a bit of a cloud over all three of the insurance sectors; The life sector seems to be suffering from the Annuity legislation to come, the motor sector from falling premiums and the Lloyds of London / underwriting sector from the recent storm damage.

To be honest, we like all four of these stocks although Catlin have become a little bit pedestrian of late. Novai and Beazley, with the addition of the special dividends look really good, but for us, we still believe that Admiral is the pick of the bunch.

Admiral has very strong reserves and looks set to continue with further dividend increases. They, along with the other motor insurers have been experiencing declining premiums, but at the same time have been seeing a fall in claims. We would expect pressure on premiums to continue for a while, but it will not last for ever and the cycle will turn upwards at some point in the next two to three years. In any event, Admiral has stated that they focus on profit as opposed to volume and this should keep margins favourable. Although we have gone for Admiral, we also like Direct Line and eSure, but they failed to get through the filter as they do not have the dividend track record that Admiral has. In addition to this, Admiral is about to pay a 50.6 p final dividend and goes ex on Wednesday. It is 1419p at the moment and has a 52 week high of 1526p and a low of 1195p.

We are estimating the next three dividends to be 50.6p (Declared), 51p and 52.5p. They are at 1419p today. At 1419p, this will generate a return of 10.63% annualised over an approximate 12 month period.

Admiral yield calculation:

50.6 + 51.0 + 52.5 = 154.1p between now and 6/5/2015 (approximate ex-dividend date of the third dividend)

Ergo 154.1p / 1419 = 10.86% 10.86% annualised = (10.86x365) / 373* = 10.63%

*Number of days until theoretical ex-dividend of the third dividend.

Note that if the dividend forecasts are correct, the actual yield (which DividendMax calls the ‘Optimized yield) is affected by two factors; the share price and the proximity to ex-dividend dates. DividendMax performs these calculations daily against hundreds of stocks in the U.K. and overseas producing new lists every day as prices change, dividends change and ex-dividend dates approach.