Investors are spoilt for choice when it comes to FTSE 100 insurance stocks. With no fewer than eight multi-billion-pound household names to choose from — including Prudential, Aviva and Legal & General (LSE: LGEN) — is there any reason for investors to look beyond the blue-chip index?
In particular, why would a £530m small cap that you’ve probably never heard of be worthy of consideration?
Dividend machine
The company in question is life insurance group Chesnara (LSE: CSN), which was spun out of Countrywide estate agency in 2004. The company released its latest annual results today, reporting “one of the busiest and most successful years” in its history, with growth across all three of its territories (UK, Sweden and Netherlands).
Net asset value at the year-end stood at £394m, while embedded/economic value (a better reference point for the intrinsic value of the business) was £603m. The latter has grown 379% from £126m in 2004, as the group has expanded with canny acquisitions.
Over the same period, investors have seen a 253% rise in the value of their shares. On top of that, dividends have increased every year — an impressive feat considering the period includes the 2008/9 financial crisis when many financials slashed their payouts. In fact, Chesnara’s dividend record has been so strong that if you’d invested £1,000 in 2004, you’d have now received over £2,000 in dividends.
At a current share price of 353p, Chesnara’s trailing price-to-earnings (P/E) ratio is 12.8 and the dividend yield is 5.5%. Its latest acquisition — Legal & General Nederland — is set to complete next week and the company has considerable scope for further growth. The attractive earnings rating, dividend yield and growth prospects lead me to rate the shares a ‘buy’.
Trade off
Blue-chip Legal & General has disposed of a number of its non-core operations since the financial crisis and the sale of its Dutch business to Chesnara comes into that category. L&G is a stronger, more focused group these days but how does it compare with Chesnara?
Let’s have a look first at the historical record of L&G over the 17-year period in which Chesnara has been in existence.
The FTSE 100 firm’s shareholders have seen a 173% rise in the value of their shares compared with the 253% enjoyed by their counterparts at Chesnara. L&G cut its dividend during the financial crisis and although it recovered strongly, the total paid out since 2004, while very decent, nevertheless falls well below that of its impressive smaller rival. L&G has paid out just over £1,000 on an investment of £1,000 compared with Chesnara’s payout of just over £2,000.
What of current valuations? At a share price of 246p, L&G is on a trailing P/E of 11.1 (compared with Chesnara’s 12.8) and a dividend yield of 5.8% (compared with Chesnara’s 5.5%). While L&G’s long-term historical return doesn’t match the small cap’s, I believe it’s also an attractive investment today, due to its blue-chip status, lower earnings rating and higher yield.