Investment view: Standard Life's a safe bet but room for improvement

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The Independent Online

Our view: Hold. Share price: 219.8p (3.1p)

Has Standard Life been more than a standard investment? The insurer was once the flag waver for mutual ownership only to be all but forced on to the stock market when regulators took fright at its lack of capital strength.

Since then it has been something of a bumpy ride but policyholders who held on to their shares haven't done too badly.

The Edinburgh life insurer is entering its sixth year as a quoted company, having joined the market on July 10, 2006 at 230p. In May 2007, less than a year after the float, the shares had hit 349.5p. They fell back, reaching a low point of 131.8p in March 2009, but have since recovered quite a bit.

Standard's customers were offered a 5 per cent discount if they bought shares at the flotation (those with savings in the with-profits funds also got free shares). Which makes the effective purchase price of 218.5p not far off today's price. Those who held on for a year, however, also qualified for free bonus shares, one for every 20 held.

According to Standard the average small shareholder held 641 shares at flotation. Assuming all the dividends paid out were re-invested into new shares and the shareholder held on long enough for the bonus shares, they will be sitting on a paper return of 37 per cent (the figures are based on a closing price of 218.7p, although the shares have fallen a touch since then). An outlay of £1,401 turned into £1,918.

Those who were issued free shares at 230p would, on the same assumptions, have enjoyed a return of 30 per cent. Not too shabby. Looking at the dividends, the shares have produced compound annual growth of 4.8 per cent (base rates today are at 0.5 per cent). So while Standard Life is on the stock market it has gone back to what it always was, a conservative Scottish life insurer which offers decent, but modest, returns. Which rather frustrates the City. Critics wonder exactly what chief executive David Nish's long-term strategy is. The company is in Asia, the hot growth market where Prudential is a big hitter and Aviva is trying to become one. But compared with them it is dabbling.

It has retained strength in the UK and Canada. Despite various talk of shifts to becoming a big direct seller, independent financial salesmen love Standard. They see it as a safe place to put their clients, and it is, although critics wonder how profitable the new business it is putting on will be.

Standard Life Investments has long been seen as the jewel in the crown, and makes good money from managing Standard's profitable back book of business. But it hasn't become quite the heavyweight some expected.

It is a cynical way of looking at things but Mr Nish is a former finance director. There's enough fat in Standard that he can hold the City at bay by cutting costs (and jobs). And he has a big advantage: Standard has grown organically. There aren't the problems with people, systems and cultures rivals such as Aviva and Pru face. This might make Standard a good takeover target, except foreign insurers tend to be sceptical about the UK life and long-term savings market. With some reason.

Standard trades on between 1.2 and 1.3 times the forecast net asset value of all its businesses, which is in line with the sector, although at 14 times forecast earnings it looks expensive. Fortunately, there is that dividend. With the forecast yield at 6.4 per cent, it has the capital to sustain that for a while.

For those looking across the sector Standard wouldn't be our first choice for people buying in and if this was a school report we'd be inclined to say "could do better". All the same, it should provide acceptable returns for those who hold.