It seems like only yesterday I was looking at Saga (LSE: SAGA) shares and thinking they were an oversold bargain after a two-year price fall.
When I mentioned full-year results due on 4 April, I suggested I was “not expecting any drastic change,” and I liked the look of Saga’s modest P/E ratings and healthy 8% dividend yield.
Then when the actual results opened saying “Saga to refocus on its heritage as a direct to consumer brand with membership at its core,” it was clear something was amiss.
Insurance
The company plunged to a reported pre-tax loss of £134.6m after recording healthy profits last year, though that was down to one-offs relating to its insurance business. It seems the old ways of luring people in with cheap introductory offers and then hiking their renewal premiums aren’t working so well in these days of meerkats and chubby opera singers with their fancy price comparisons.
Underlying pre-tax profit was put at £180.3m, down just 5.4%, and net debt dropped by 9.4% too, which isn’t so bad. But the big killer is the dividend, which is to be slashed by more than half. The proposed 4p per share would have yielded just 3.7% on Wednesday’s close, but since the price collapse we’re now looking at 5.8% — still respectable. Saga is aiming for future payments of around 50% of earnings per share, which at least sounds sustainable.
The big questions for me were whether we might have seen this coming and what we can learn from it?
No clue
I certainly had no inkling of any problems, though looking back at the low valuation of the shares I guess a good few investors had their suspicions. So there’s one lesson there — just because you can’t see a reason for a stock’s low price, that doesn’t mean there isn’t one.
The BBC made an interesting observation, that when the company floated in 2014, apparently around half of the shares were bought by customers. I didn’t know that (and having not been carefully following things back then, I don’t know how I could have found out).
Emotion
I avoid investing in any company with which I have a personal relationship, especially as an enthusiastic customer, because I don’t trust myself to be as objective as I should. So when so many customers piled into Saga, was that a sign the valuation of the company was based too much on emotional reasons?
My abilities to see events like this coming are poor, and that’s what leads me to favour diversification. A 35% loss on Saga wouldn’t be so bad if you were invested equally in, say, 10 stocks — your portfolio would only be down 3.5% overall.
A way back?
What about the future? I think the big thing to take here is that Saga’s brand might be irreparably damaged. A number of commentators have suggested it, but the hint is in the results announcement itself — it’s full of talk about increasing commoditisation of the business.
With price becoming the key factor in holiday choices these days, fewer and fewer people are going with tried and trusted brands. And if you’re investing for the next couple of decades you need to be brutally honest — Saga’s current loyal customers are not immortal.