Thinking of buying the Saga share price? Read this first

Woman calculating figures next to a laptop
Woman calculating figures next to a laptop

Shares of over-50s insurance and travel group Saga (LSE: SAGA) edged higher on Thursday after the company issued a solid set of half-year results.

The Saga share price has regained some ground since last December’s profit warning. But longer-term shareholders will still be painfully aware that the stock is worth about 35% less than it was one year ago.

Today I’m going to look at the firm’s latest figures and give my verdict on whether the shares deserve a buy rating. I’ll also look at a rather different insurer with attractive long-term income potential.

Good progress in difficult conditions

Saga’s underlying pre-tax profit fell by 3.7% to £106.8m during the six months to 31 July. The company said that new customer acquisition costs were higher in a competitive market, but noted that customer retention had improved in its insurance business.

Reassuringly, operating cash flow remained unchanged at £89.5m. Net debt was £429.7m at the end of July, down slightly from £432m at the end of January. Debt is now equivalent to 1.77x adjusted cash earnings. This looks manageable to me. I think that a dividend cut is unlikely unless new problems arise.

More customers

Customer numbers for insurance have now returned to levels last seen during the first half of 2017, thanks to a 19% increase in motor and home insurance policies. Another bonus is that 44% of customers now pay for more than one insurance product. According to the firm, this is an “industry leading level of multiple product holdings”.

This growth is probably being helped by the increasing membership of the group’s Possibilities loyalty scheme, which has risen from “over half a million” in April to 850,000 today.

What seems to be more difficult is translating higher customer numbers into profit growth. In today’s results, chief executive Lance Batchelor says the group is benefiting from lower operating expenses but faces a “competitive pricing landscape”.

The company’s profits have now been fairly flat for several years. This isn’t ideal but I think the forecast P/E of 9.5 reflects this risk, especially as the 7.1% dividend yield appears to be sustainable.

I’d be happy to buy Saga at current levels.

A high-yield alternative

By pinning its dividend at a high level, Saga runs the risk of disappointing investors if it has to cut the payout. An alternative approach used by some insurers is to pay a more modest dividend and to supplement this with special dividends when spare cash is available.

That’s the method used by Lancashire Holdings (LSE: LRE), which has earned a reputation for dividend yields as high as 10% in recent years. This specialist insurer covers large, valuable assets such as merchant ships and major buildings.

Markets have been tough in recent years, due to increased competition. However, last year’s hurricane season in North America is now providing some support for higher premium rates. Chief executive Alex Maloney says that pricing peaked in January but the group has enjoyed “rate increases across most of our lines of business”.

Broker forecasts suggest a 2018 dividend yield of 5.1%, rising to 7.2% in 2019. My Foolish colleague Rupert Hargreaves believes a higher payout might be possible.

In either case, I rate this specialist firm as a good long-term income buy that should diversify most portfolios. This is a stock I’d be happy to buy and hold, averaging down into any market crashes.

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Roland Head has no position in any of the shares mentioned. 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.