What do you call a company that’s cut its dividend by 33%, issued a profit warning, and accepted the resignation of its Ireland chief executive on suspicion of accounting irregularities, all in the space of 12 months?
In this case, the answer is RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSANY.US), a firm whose share price has declined by 19% so far this year — so much so that its prospective dividend yield has risen above 6% once more, despite the cuts to its payout.
The resignation of RSA Ireland CEO Philip Smith following allegations of accounting irregularities is the latest below to shareholders, and the episode is expected to cost the firm £70m in lost operating profits.
Indeed, over the last five years, RSA investors have seen the value of their shares fall by 29% — compared to a 61% gain for the FTSE 100, and a 17% gain for RSA’s UK peer Aviva.
Despite all of this, short term bad news, such as RSA’s recent weather-induced profit warning, isn’t necessarily a reason to sell a stock. Indeed, it can be a good buying opportunity — so why do I rate RSA shares as a sell?
Just not cheap enough
RSA’s net asset value per share was 99p at the start of November, down from 103p in August and 107p at the end of last year. None of these figures include RSA’s pension deficit, which was valued at £442m in July — a sum which equates to 12p a share. RSA has agreed to reduce this deficit with additional payments of between £60m and £70m per year until 2016, placing more pressure on its profits.
Given RSA’s patchy track record, I wouldn’t buy the insurer’s shares today unless they traded at a discount to their net asset value — and given this year’s slide in net asset value, I’d want a decent margin of safety, too, in case the fall continues.
In my view, RSA would be good value at around 95p, which would place them on a 2013 forecast P/E of 12, still a considerable premium to Aviva, whose shares currently trade on a 2013 forecast P/E of 9.7.
A better buy for income?
RSA enjoyed a strong reputation with income investors who believed its dividend wouldn’t be cut. That belief is now history and with limited cash flow to cover the firm’s dividend payout, a further cut isn’t impossible.