Investment Column: L&G is the pick of the life insurance sector

Shire; Marston's
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Our view: Buy

Share price: 89.65p (-1.15p)

From an investor perspective, there was an awful lot to like about Legal & General's results this time round. The company comfortably beat consensus forecasts on virtually every metric you'd care to look at, returning a pre-tax profit of £537m (against last time's £143m loss) and hiking the dividend by 20 per cent to 1.33p.

Of course, that needs to be taken in context – in March the company cut the payout for the first time citing the need to conserve capital. Now, though, things are back on track and L&G threw off £358m of cash in the first half, which puts it comfortably ahead of its £600m target for the full year. Even so, L&G is still taking a cautious approach to the payout – it wants it covered two-three times by cash and currently it's closer to three. Chief executive Tim Breedon argues that regulatory and economic uncertainties put a premium on prudence.

However, he also sees opportunities as the state pulls out of various areas and people continue to increase their savings at a time when many rivals are retrenching or withdrawing from the market. However, shareholders can be reassured that L&G continues to favour organic growth over acquisitions. The likelihood of it attempting to engage in value destructive deals, such as the farce of Prudential's failed Asian gamble or questionable projects such as that being pursued by the offshore sharks at Resolution, are slim.

It is interested in expanding in Asia (India is already a work in progress) but is likely to do this through bancassurance deals or perhaps smaller acquisitions. Even with a conservative approach towards the dividend, these shares still offer a healthy, prospective yield of 4.8 per cent while they trade, on a 27 per cent discount to Panmure's 2010 forecast of the shares' book value. L&G is cheaper than its main quoted rivals and offers more security and strategic coherence. In fact, L&G looks, on current form, to be the pick of the sector. We say buy.

Shire

Our view: Hold

Share price: 1429p (-44p)

Shire delivered a dose of good news with its second-quarter figures yesterday, raising its full-year forecasts as earnings pulled ahead of expectations. The results follow news of plans to buy Belgium's Movetis in a deal that will boost the pharma group's portfolio of gastrointestinal products and support growth. These developments – the upbeat results, the promising acquisition – speak of a strong company primed for growth, an enviable proposition at the best of times.

The fact that the macroeconomic picture remains uninspiring further weighs in Shire's favour. Pharma tends to benefit when markets wobble as investors flee cyclical stocks.

However, there are reasons to be cautious. Analysts at Bernstein recently highlighted what they considered low levels of concern about US studies looking into possible heart risks connected to Shire's attention deficit hyperactivity disorder (ADHD) drugs. Now, the US Food and Drug Administration, which was due to publish the results of studies into children in August and adults in October, has pushed the reports back to the first quarter of 2011. Though unlikely, there is a small chance of a negative outcome for Shire, which trades on multiples of just under 18 times forecast earnings for 2010, according to Evolution. We think the shares are probably fairly valued at present, so hold.

Marston's

Our view: Buy

Share price: 98.75p (+0.8p)

Balmy weather and good sales of its popular pub grub were the name of the game for the pub and brewing group Marston's for the 43 weeks to 31 July. At its Marston's Inns and Taverns managed pub division, underlying sales rose by 1.7 per cent, with food sales up by 2.5 per cent and drink revenues higher by 1.3 per cent.

While the weather helped Marston's, which has 488 managed pubs, the food sales are worthy of note: in a challenged sector this division is in the right strategic spot and improved like-for-like sales growth of 2.7 per cent over the most recent 11 weeks bears that out. Investors will also be pleased with a rise in operating margins of 0.6 per cent.

It's not all rosy. Underlying sales fell by 4 per cent in the 43 weeks to 31 July at Marston's pub company, which has 1,671 tenanted and leasehold pubs. But Marston's hopes to improve their performance by moving about 600 on to a new retail agreement which is similar to a franchise contract and should incentivise publicans, compared to just 88 now. Like so many, Marston's is likely to face a constrained consumer in the coming months but the shares, on just nine times 2011 forecast earnings, look inexpensive. Buy.

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