James Moore: Disappointing Standard Lifesaved by dividend
Investment View: Prudential's hubris has prompted it to embark on two failed mega-mergers
James Moore is the Independent's Associate Business Editor and writes the Outlook City comment column from Tuesday to Friday. He also has a keen interest in disability issues and when not attempting to further injure himself playing wheelchair basketball.
Friday 18 May 2012
Standard Life 202.6p (-4.6p)
Our view Hold
Prudential 686p (-14.5p)
Our view Avoid
St James's Place capita l311.3p (-5.9p)
Our view Hold
Following last week's look at Legal & General and Aviva, how about Standard Life, which once ran a rather cringeworthy ad campaign in which lots of actors gushed, "I like Standard Life". Would any investors say this?
Not recently. The shares have been falling and now stand at just over 200p. It floated at 230p so the legion of policyholders who received free shares when it demutualised, or at least those who bought them at that time, appear to be out of pocket.
Well, not quite. They got a 5 per cent up front discount and another 5 per cent bonus for holding on for a year. Plus a truckload of dividends. So it's not all bad.
But Standard Life still presents something of a conundrum. It trades on just 1.1 times the value of its in-force book of business, slightly less than its rival UK-focused peer Legal & General. However, based on forecast earnings it is much, much more expensive at 11.8 times this year's numbers. That makes Standard look pricey even compared with Prudential (see below) which offers much better growth prospects.
In terms of profits, then, Standard isn't doing as well as it should do. And there are some who doubt management's ability to address that issue, cosseted as they are in the arms of a rather low-risk business and buoyed by incentive schemes which make it too easy for them to earn bumper bonuses. Maybe the fate of Aviva's Andrew Moss, who resigned under pressure from shareholders, will concentrate minds.
The company did do rather better than analysts had forecast at its recent first-quarter trading update. Revenues at £5bn were down, but not by as much as had been feared, while corporate pensions business poured in and assets under management ticked up to £207bn, a 4 per cent rise.
When I last looked at Standard Life, on 21 December, the shares stood at 197.6p. They are marginally ahead of that now. Standard faces the same issue as its peers: it isn't going to be easy persuading squeezed consumers in the UK to save, although Standard does have businesses in Canada and the Far East which might offer better prospects.
All that said, the dividend makes these shares worth holding on to, and it is fully covered by earnings so shouldn't be under threat. Hold.
So to the aforementioned Prudential. The man of from the Pru is gone from the UK, a casualty of regulation that was introduced in part because of his habit of selling people wildly inappropriate products. But he's very much alive and kicking in Vietnam. And all over the Far East, in fact.
In the former, at least, the company's salesmen used to venerate its executives by having big pictures of them on their lockers. Investors should worry about this. Prudential has long suffered from institutional arrogance, and its overwhelming hubris has prompted it to embark on two failed mega-mergers that were both handled with breathtaking incompetence. The most recent attempted deal, with the Asian insurer AIA, now looks like it might have been a good one (it's doing very well). Unfortunately Prudential's directors didn't give any impression that they could pull off a deal that would have doubled the company's size.
The existing Asian businesses are, however, positively zinging – in the first-quarter trading update Pru revealed that they had grown by 22 per cent. Its fund management operations also turned in net inflows of £2.1bn.
The downside is that investors have to pay up for this. The shares trade at nearly twice the value of Pru's in-force book of businesses and on a multiple of 10.4 times earnings, with a prospective yield, 3.4 per cent, that doesn't even come close to its peers. The shares performed very strongly in the first part of the year, but have since eased a bit. They look like a decent investment. But I always ask the following question: would I put my money in this company. The answer with Prudential is no, because I wouldn't trust its directors not to make the sort of silly mistakes that have held the company back for years.
St James's Place Capital targets high-net-worth investors through an army of more than 1,000 financial advisers. It is two-thirds owned by Lloyds Banking Group, but how long that will last is anyone's guess. In terms of performance it is one of the best businesses Lloyds has in its portfolio. On valuation grounds the company is expensive at a shade above 15 times earnings while yielding just 3 per cent. However, I remain of the view that this is a stock that is worth holding.
The company has consistently outperformed the City's expectations and its wealthy client base is far more resilient to the squeeze than the rest of the country. They are more likely to save and, with the returns from cash so pitiful, they are more likely to save through equity linked products offering a decent margin. Hold.
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