Hiscox
45p special dividend for 2014
One of the attractions of the London underwriters such as Hiscox is the large amount of cash they throw off when the market is favourable in terms of big catastrophe claims. This is often recycled to investors in the form of special dividends.
This is because, given the low pricing across the industry over the past couple of years, itself a consequence of the extra capital coming into the market, the insurers are understandably unwilling to chase less profitable business.
And yet there is always an ambivalence towards paying special dividends, because investors might expect their funds to be usefully invested elsewhere. Hiscox, the largest of the four surviving London underwriters after takeovers have taken several off the market, paid a 45p special for 2014.
It is, however, talking down the prospects for this year’s payment because it believes the money can be better spent elsewhere. The nine-month figures give an indication why.
Hiscox has generally eschewed acquisitions in favour of organic growth, though it did buy its way into the Far East last year. The company has also picked up a couple of useful niche insurers this year, for very big yachts and classic cars, which fit with its focus on serving high net worth individuals.
The US operation will reach its 10th anniversary next year. This has been grown organically, a slower but safer route, specialising in serving professionals and small and medium-sized companies. In the London market, it has hooked up with a business that provides extended warranties on cars. Both were stand-out areas for growth, if you disregard that Asian offshoot, which is coming from a low base.
If Hiscox can continue to grow premiums profitably at this sort of rate, shareholders cannot complain at a lower special payment next spring. The company is also going to lock in borrowings at current low levels by issuing a bond, which would at least replace the £440 million in letters of credit that have to be renegotiated every year. A bond issue would have the added advantage that it would count towards the capital Hiscox has to hold under the forthcoming Solvency II regulatory regime.
As ever with insurers there is the worry of an upsurge in catastrophe claims. The shares, off ??p at ???p, are expensively rated, on more than twice net assets. This is, I think, a case of you get what you pay for, because the company is the best regarded of those surviving underwriters.
7.9% Rise in premiums, local currency
MY ADVICE Buy long term
WHY Although the shares are on a high rating, they are the best-regarded in the sector, while it is encouraging that Hiscox is investing spare cash
Dignity
Revenue £227m up 15.6%
There is no other way of putting it: the quoted funeral director does well when more people, on average, are dying. This year has been a rather good one for Dignity, with the UK’s death rate rising by 13 per cent in the first half and then flattening off in the third quarter.
There is no particular reason for this and, although Dignity says the outcome for this year will be better than the market expects, the death rate probably will revert to the mean next year. The rate is less relevant to the business than its acquisition of new funeral chains and branches and subsequent gain in market share.
Revenues for the year to date were up by nearly 16 per cent because of those market share gains and efficiencies from greater use of its facilities. Dignity has managed to gain planning permission to add a crematorium in Derby to its 39 such sites, another source of growth.
Dignity has paid cash returns to investors in recent years, but nothing is imminent and, without this, the yield is minimal. The shares, up 52p at £25.10, sell on more than 20 times’ next year’s earnings. The long-term story is still there, but those in since the start of the year, when the shares were below £20, might consider taking some profits.
MY ADVICE Take profits
WHY Shares up a long way, no cash return imminent
Aggreko
Profit guidance for 2015 £250m-£270m
I have been dithering all summer, wondering if now is the time to get back on board Aggreko. The shares had pretty much halved in the autumn from their peak at the start of the year, although they bounced 33p to 965p after third-quarter figures that at least did not contain another profit warning.
Only one analyst has the shares on a “buy” recommendation, pointing out that, whatever the problems the company has encountered on various contracts and the difficult state of the oil and gas markets, margins are back to where they were when commodity prices were high and the shares trade on a lower multiple than the market as a whole.
Gone are the days, then, when Aggreko was a go-go stock on 20 times’ or more earnings. Chris Weston, the chief executive since the start of the year, has been cutting costs and scaling back investment. There are positives in the nine-month trading statement, such as the switch at its rental solutions business from oil and gas to booming areas such as petrochemicals and refining, which left revenues there flat, a good enough outcome.
There must be a suspicion that the previous management had little reason to focus on such areas because Aggreko was growing so quickly elsewhere, providing temporary power to developing nations. Revenues across the group are still falling, though, down 7 per cent on an underlying basis. Next year will be difficult as several contracts come up for renewal, adding to the uncertainty. The shares are on 14 times’ this year’s earnings. There still seems no reason to buy now.
MY ADVICE Avoid for now
WHY Recovery will come, but no obvious catalysts yet
And finally ...
Arrow Global is a difficult stock to value because there are few obvious comparators. It buys distressed debt at a small fraction of its face value and then collects what it can. The shares were floated at 205p two years ago and, at 256¾p yesterday, have performed well enough. Arrow is expanding on the Continent, having bought into Portugal and France. The latest deal is a portfolio of loans in the Netherlands with a face value of €173 million and a purchase price of perhaps £20 million, analysts believe.
