As dividend stocks go, Prudential and Legal and General both have mixed track records.
On the one hand, they operate in a sector which is relatively immune to the economic cycle (people don’t typically cancel their life insurance just because there’s a recession).
On the other hand, and despite their blue chip credentials, Prudential cut its dividend following the bear market of 2003 and Legal and General cut its dividend following the bear market of 2008.
However, if these insurers have learned the right lessons, and if their shares are trading at reasonable prices today, then I think the potential yield plus growth rewards could be worth the risk.
With that in mind, I used my latest article for Master Investor magazine as an opportunity to pit these two life insurance giants against each other to see who comes out on top:
Bag a premium income from the insurance majors
“”However, if these insurers have learned the right lessons”””
John, This statement jumped out and hit me in the face. I don’t think companies like these corporates “ever” learn lessons, as they are run by different directors with their own personal interests at the forefront during their tenure.
If there is one sure fire thing about history is that few learn from it – yes they read about it and then ignore it on the basis, “that was then” and “now is now”, and I have to manage this to the best return for me and my career (sounds rather jaundiced, but I don’t think so)..
Only yesterday there was an article highlighting that the UK banks where a busted flush and that the stress tests and the measurement criteria set by the likes of Mark Carney completely ignore the true market value of the underlying assets in a real world environment, and the banks are in effect much more leveraged today than they were 10 years ago.
Actually when you think about it this isn’t surprising and you don’t have to be a rocket scientist or a numbers analyst to work this out since assets have bubbled up over the last 10 years and the house you are living in is 2X the value and your salary is the same – both even after inflation adjustment.
As for Legal and General – there is one potential (and it is I stress potential, not a given of course) big future liability they are building — “Pensions” — the business model is to buy up everyone’s cast offs and use the figures to flatter today’s numbers and the managers bonuses at the expense of the future. If these pensions were so attractive, why are they being offloaded and paying L&G to take them away?
The managers will all be retired when the merde hits the fan.
L&G ? — also their move into house building at the top of the cycle seems to be completely out of the their comfort zone and in a dangerous time — especially when you see all the directors offloading the house building shares in very big numbers indeed — these guys can see what’s coming.
Houses around where I live have been on the market for 8 or 9 months with several price reductions.
It’s potentially all over in this sector — In my view of course — not in some fund managers eyes of course. With respect to the timing of the investment, L&G dropped to 40p in 2009 — if we (or more likely when we) experience a serious banking credit crunch, it’s highly likely to revisit that area, as the liabilities (or assets as they are set out on the balance sheet) could be seriously restated and the payouts to the retirees must continue.
John Kingham says
“This statement jumped out and hit me in the face” – Sorry about that!
As for L&G, you’ve made some valid points. It will be interesting to see how their pensions business does in the years ahead, since, as you say, they’re hoovering up everyone else’s high-risk pensions.
My assumption is that L&G employ lots of clever people who understand this sort of thing, but then again the same assumptions apply to banks, and look how that ended.
As for its property investments, my understanding is that they’re for generating long-term annuity income, financed with annuity premiums. So house prices should, I assume, be less important than a steady stream of tenants. But of course there are risks in all these things.
And on corporations learning from mistakes, I think you’re probably right, but some companies do manage to embed lessons into their culture, although I think that’s the exception rather than the rule.
As always, it will be interesting (for me at least) to see how L&G fairs over the next five or ten years.
John – Well changing the subject, Next and IGG have recovered some nice ground. Having entered both at very luck low points I’m wondering about early exits but it might mean leaving quite a lot on the table given the current well covered dividends — looking at the last two rounds of results the business falls have not actaully been anything more than modest — hysteria eh, isn’t it wonderful.
Bought RB today — price and risk look reasonably ba;anced at the 67xx level – the acquisition of MJ does need to go well though.
John Kingham says
RB is interesting because it’s supposed to be one of the bond-proxy “inevitables”, but it hasn’t really gone anywhere for years. Like Unilever, its recent growth rate is very uninspiring, other than the Brexit-boost from a devalued pound. The price isn’t quite in the zone for me though, given its weak growth and low dividend yield.
John – I guess the high return on capital employed for RB and Unilever has allowed them to be consistently good investments for the shareholders over many years.
The earnings and dividend growth of Unilever have been quite consistent, rising from about 130p in 2012 to approx 200p today — pretty impressive for such a large company. Also the dividend has grown along with it at a similar rate, as has that at RB. Unilever has scope to restructure and tighten it’s costs and improve margins and the threat from Warren Buffet has put this in the spotlight.
RB has consistently had much higher margins (25-26% compared to Unilever at 16%). RB’s revenue growth looks to be set to go higher than Unilever (some £9Bn in 2012 and £11-13Bn this year and next). Also RB’s earnings at 266p in 2012 have grown well and are still growing, with a projected 334p this year and 377p next.
I’m betting that the Mead Johnson acquisition is going to be handled well and the recent poor press at RB and the sell off is an entry opportunity — time will tell of course.
John Kingham says
I’m not a massive fan of Unilever at current prices. Other than the Brexit bounce (thanks to the falling pound), revenues have been about flat for 7yrs, as have earnings. The dividend has grown faster, but of course dividend growth is ultimately limited by revenues and earnings. RB seems to be even more post-growth, but of course that’s all in the past and the future could be different.
I will of course be happy to jump into either company if Mr Market gives me the pessimistic price that I’m after, but that would require the bond-proxies to fall out of favour, which might take a while.