The Saga (LSE: SAGA) share price has been slipping since I last wrote about the company in April 2018. Back then, I thought the cruises, holidays, insurance, personal finance and publishing provider for the over 50s looked like good value when the stock was around 131p.
The company had an attractive growth and turnaround story to work through, I believed, following a profit warning in December 2017 that caused the shares to plunge around 40%.
Today, though, the price languishes around 108p and the traditional valuation indicators have made the firm look even cheaper. The forward-looking earnings multiple for 2020 sits close to 7.5 and the anticipated dividend yield is just below eight. City analysts expect earnings to come in essentially flat this year, before rising around 9% next year, and to cover the dividend payment just over one-and-a-half times.
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Is this value compelling?
Because the shares have gone down, that dividend yield has pushed above the 7% I’m normally comfortable with. When yields go higher than that, I tend to see them as a warning. But there’s something about Saga that keeps me positive on the stock. I think it’s because of that forecast of rising earnings down the line. And because I believe the firm has a strong franchise in its brand with a following of many loyal customers.
Mid-January’s trading update revealed that the second half of the year had gone quite well and the results had met directors’ expectations. The insurance broking business suffered “pressure” on profitability, due to competitive markets, but the underwriting business offset the weakness with an outcome that was better than anticipated. Meanwhile, the travel business performed well with “good progress on cruise bookings.”
To put things in perspective, insurance operations dwarf the travel and emerging businesses in the accounts. Insurance-related operations delivered around 75% of overall gross profit in 2017. But the travel business is interesting for its growth potential. Forward sales are going well for two new cruise ships, Spirit of Adventure and Spirit of Discovery, and they will replace the Saga Pearl II and Saga Saphhire due to leave service in 2019 and 2020, respectively.
Trading up
Meanwhile, the company tells us in the report that tour revenue for 2019/20 departures is “approximately flat” due to a “change in mix towards higher margin products, with fewer passengers.” That strikes me as a good strategy. I reckon Saga is known for its reliable quality offer and aiming for higher-margin business seems to leverage the brand.
The company also has ambitions to become a “member-led organisation.” A new creative advertising campaign “across TV, press, digital media and direct marketing spanning our holidays, cruise and travel insurance products” aims to increase customers. And the Possibilities membership scheme attracted 250k more members since September, taking the total to around 1m.
On balance, despite the fall in the share price, the ultra-high yield and a niggling worry that I have about the inherent cyclicality in the operations, I’d still dip a toe in the water by buying some Saga shares. There’s just too much going on in the company and the brand is too strong for me to turn my back on it.
