Be brave and snap up Saga for a handsome 7% dividend yield
We’re taking a bold step and saying now is the time to buy over-50s travel and insurance specialist Saga (SAGA). We believe the business still has significant appeal despite some recent setbacks. You’re also getting paid a near-7% dividend yield while you wait for the return of earnings growth.
Four months ago Saga flagged trading issues in its insurance broking and travel businesses, in part due to the collapse of airline Monarch. Forward earnings guidance was also slashed due to higher investment spend to target high affinity customers and increase its customer numbers across the business in the coming years.
So why are we saying to buy now? Full year results to 31 January 2018 (published on 12 April) were in line with the revised guidance issued in December 2017. The company also remains highly cash generative, plus it reported ‘promising’ early signs with
new business as a result of its plan to boost its customer base.
WHAT TO EXPECT
We think investors should approach Saga as an income investment and not expect significant share price growth in the near-term. The company needs to show evidence that its capital employed is generating a decent return in order to win back the market’s favour. That could take a year or more to achieve.
Any capital gains (i.e. share price rise) should therefore be treated as a nice bonus; if the share price goes nowhere then you’re still being rewarded with a nice dividend.
Saga’s travel business enjoys great visibility of bookings as its customers prefer to book their holidays in advance. However, travel only makes up for around 10% of the company’s profits, so its fortunes arguably rest with its dominant insurance business.
The company has shifted to an affinity model and uses a panel of insurance brokers to find solutions for its customers and retain their loyalty.
This should help address the threat of customers researching the market themselves and picking a third party product aimed specifically at their demographic.
Another new initiative is a membership scheme called Possibilities which has already amassed over half a million members. The company believes this scheme greatly increases the chances of cross-selling opportunities.
WHAT’S THE EARNINGS POTENTIAL?
Stockbroker Numis forecasts 8.75p dividend for the current financial year, implying a 6.9% yield on the latest share price. Pre-tax profit is expected to dip slightly this financial year to £177m, before progressing to £184.8m in the year to 31 January 2020.
This isn’t a risk-free investment, yet the shares trading on a mere 9.9 times forecast earnings look like they’ve fully factored in the recent setbacks. (DS)