Is It Still Safe to Buy RSA Insurance?


LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market. However, many people are currently worried the market could be overheating.

So right now I'm analyzing some of the most popular companies in the FTSE 100, hoping to establish if they can continue to outperform in today's uncertain economy.

Today I'm looking at insurance company RSA to determine whether the shares are still safe to buy at 115 pence.

So, how's business going?
RSA fell out of favor with the market earlier this year when the company announced that it was going to slash its final dividend by 33%, citing lower returns on its investment portfolio.

However, I believe this sell-off has been overdone, and it would appear some City analysts agree. In particular, some analysts believe the new lower payout will allow the company to retain more cash, in order to fund future growth and acquisitions.

Furthermore, the new dividend is now covered twice by earnings, giving me confidence that the payout will be maintained at this level.

In addition, despite the dividend cut, the company's underlying businesses continue to grow. Indeed, within RSA's first quarter trading update, management stated that RSA had made "an encouraging start to the year" and that the number of new of new insurance premiums written had grown by 7%.

Moreover, during the period, the company's sales within emerging markets expanded 16%.

Expected growth
Unfortunately, RSA's earnings fell 36% during 2012, which the company blamed again on falling returns from its investment portfolio. That said, many City analysts expect RSA to return to growth this year.

City forecasts currently predict earnings of 12.3 pence per share for this year (17% growth), and 12.7 pence for 2014.

Shareholder returns
After cutting last year's dividend from 9.2 pence per share to 7.3 pence, RSA's is expected to reduce its payout again this year. The City expects the firm to offer a dividend of 6.5 pence per share for this year, and the same City forecast expects this payout to remain unchanged until 2015.

Having said that, even after the dividend cut, RSA still supports a yield of 5.6% -- larger than that of its peers in the nonlife insurance sector, which currently offer an average dividend yield of 4.6%.

Because of its falling earnings and dividend cut, RSA trades at a discount to its peers. RSA currently trades at a historic P/E of 11, while its peers trade at an average historic P/E of around 11.9.

Foolish summary
Overall, despite RSA's dividend cut, the underlying company looks strong and set to achieve double-digit earnings growth this year.

So, all-in-all, I believe RSA still looks safe to buy at 115 pence.

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In the meantime, please stay tuned for my next FTSE 100 verdict.

The article Is It Still Safe to Buy RSA Insurance? originally appeared on

Rupert does not own any share mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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