Should you buy Neil Woodford stock Saga after today's share price rise?

It's no secret that Neil Woodford has had his fair share of investing disasters over the last year or so. Saga(LSE: SAGA) is one such stock that has let the portfolio manager down. This time last year, the shares were trading at 210p. Today, they are changing hands for 123p, a decline of 40%.

The over-50s travel and insurance group released preliminary results for the year ended 31 January this morning and the share price has surged over 5%. Is it time then, to take a closer look at the FTSE 250 stock? Does it have turnaround potential?

Positive takeaways

There are definitely positives to take away from this morning's update. Despite the problems the company has faced in the last six months, revenue for the year only fell 1.3%. Underlying profit before tax increased 1.4% for the period, while underlying earnings per share rose 0.7% to 13.8p, beating analysts' estimates. The company advised that it continues to be "highly cash generative" and was able to reduce its net debt-to-EBITDA ratio to 1.7 times, as well as increase its dividend by 6% to 9p per share.

While trading conditions remain challenging in insurance, the travel side of the business appears to be performing well. This segment achieved growth in revenue and underlying profit before tax of 3.9% and 36.9% respectively for the year. Looking ahead, Saga believes profit before tax in this division can grow by "four to five times" over the five years from January 2017. The company noted that it has already secured the majority of its FY2019 sales targets in both tour operating and cruising.

CEO Lance Batchelor was upbeat in his outlook, commenting: "A comprehensive overhaul of our systems, a clear focus on the development of our offering, and progress in developing our retail broking model, give us a strong foundation from which to increase customer engagement and retention. We are also beginning to see the benefits of our targeted investment in retail broking and travel. These early signs, together with the arrival of our new ships in 2019 and 2020, give me confidence in our ability to return the business to sustainable profit growth."

Dividend confidence

The dividend hike of 6% is a highlight of today's results, in my view, and shouldn't be ignored. Unlike Woodford holding Provident Financial, which slashed its payout last year when it ran into difficulties, Saga has lifted its payout by an inflation-beating margin and this suggests that management is confident about the future. The company stated that it is committed to a long-term sustainable dividend policy and that the decision to increase the payout to 9p per share "reflects the Board's ongoing confidence in the stability of our highly cash generative model." The payout equates to a yield of 7.3% at the current share price.

Low valuation

Today's earnings figure places the stock on a trailing P/E ratio of just 8.9. I think that's quite an attractive valuation given that the company is cash generative, has a solid balance sheet and is well placed to benefit from the UK's ageing population. In my opinion, Saga could be a good stock to buy and tuck away for a few years. The share price may not climb significantly higher in the short term, yet with a 7.3% dividend yield on offer, investors get paid to wait for a turnaround.

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Edward Sheldon has no position in Saga. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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