Should I Buy RSA Insurance Group Plc?

The Motley Fool

When I cast my eye over RSA Insurance Group (LSE: RSA)in October, the only thing I liked about it was the yield. At 8.2%, there was a lot to like, although I wondered how long it could be sustained. Not long, as it turned out. Management slashed the dividend in February, with predictable consequences for the share price. Should I buy RSA today?

RSA was under the weather last year, as yet another damp summer washed away profits in the UK, and earthquakes in Italy shook its European profits. In February, the really bad news blew in, with management announcing a whopping 33% cut in its dividend from 5.82p in 2011 to 3.9p a share. The board blamed low bond yields for the poor return on its investments, and warned of a similar percentage reduction in 2013. Group chief executive Simon Lee claimed the cut was in the best interests of shareholders, but they were too busy scuttling for the exits, as the share price plunged more than 11% in moments.

Simon says

The news looked like the culmination of a rotten five years for RSA. Its share price is down 4% in that time, against a 30% rise for the FTSE 100 as a whole. But there's nothing like buying on bad news, and in recent weeks RSA has defied market volatility to stage a recovery. It is up 10% since mid-April, against a 2% drop in the FTSE 100. An encouraging first-quarter update helped, with premium growth of 7%, and Lee's claim that the group was on course to hit its 2013 targets of "good premium growth, a combined ratio of better than 95%, and return on equity of 10-12%".

RSA also reported healthy 18% growth in Canada, including acquisitions, and 16% growth in emerging markets. Strong performance in Asia, Central and Eastern Europe, and the Middle East offset a sluggish Scandinavia, UK and Western Europe. RSA's net asset value rose 5% to £1.12 per share.

Safer income

Admit it, that 8.2% dividend never looked sustainable. In fact, I'm almost glad it's gone. Re-basing it does seem sensible, especially if the savings are re-invested to drive growth and acquisitions. Another attraction, at least for new investors, is that it offers scope for future progression from 2014.

At 12.7 times earnings, RSA isn't particularly cheap, trading in line with the average valuation for the index. Yet earnings per share growth looks strong, at a forecast 28% in 2013, settling down to 6% in 2014. Brokers are now swinging round in its favour, with a raft of outperform and overweight recommendations from Morgan Stanley, Credit Suisse and Exane BNP Paribas. I'm swinging in favour of this stock as well. RSA looks like a solid portfolio holding, and now could be a good time to buy it.

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