Wednesday, 9 April 2014

New Year's Resolution! (Portfolio Buy)

Keep Your New Year's Resolutions All Year
Ummm...
Source
A new Financial Year - a good time to make new resolutions to improve my investing style. But this is one that is a bit different - it's a new purchase, in fact. Actually, it's a re-purchase of an old favourite that has come back onto the high-yield radar.

Resolution (LSE:RSL - soon to complete rebranding to 'Friends Life Group') is a British insurance 'takeover specialist', which buys life insurers to merge them into (in theory) a more profitable whole. Resolution bought Friends Provident in 2009 and took its place in the FTSE 100. In 2010, it snapped up the UK savings and life assurance arm of France's AXA and Bupa's life, critical illness and income protection business, bringing them together under as the Friends Life Group.

Resolution's shares performed quite strongly until March 2012. No doubt it pleased institutional shareholders by returning £500 million in share buybacks, after claiming there were no further acquisitions worth pursuing: it pulled out of the bidding for Phoenix (which I also currently hold) - indicating that it was keeping a sharp eye on value for money.

But then the share price plummeted, as a result of a string of management changes, and growing concerns that what was supposed to be a cash cow for investors was possibly running dry. There was more bad news, as integrating AXA into its business appears to have been more difficult and expensive than anticipated (particularly in respect of the IT systems) and implementing its outsourcing strategy. The international division also seemed to be having a number of problems.

I first bought Resolution back in November 2011 and then bought some more, finally selling it with a 46% capital gain two years later.

Today, Resolution offers a massive 7.5% yield with a dividend cover of 1.5. Moreover, its 2013 results are generally positive and contains an important commitment to improve the dividend (which has been frozen for the time being) when free cash flow allows.

The high yield is, as always, a sign of the market's concern. In this case probably mainly related to the on-going review of the UK's Financial Conduct Authority into life policies. It might be the next 'PPI' scandal - or then again it might not: I'm betting 'not'.

So there you have the key elements of a DIY Income Investor purchase:
  • high yield
  • Mr Market's dislike for the security due to uncertainty about a key factor
  • A 'gamble' that Mr Market is overly cautious

It can backfire - so be warned!

[Purchase price: £2.77692 - I wish the rest of life was that precise!]


I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

2 comments:

  1. The yield is indeed spectacular in the current climate but caution is advised, the founder and CEO has recently announced his departure and the campaign against the "Zombie" pension funds that generate the bulk of profits for these consolidated life companies is gathering momentum. Companies like Resolution and Phoenix essentially make their profits off pension savers who were basically missold their pension plans 20-30 yrs ago. Given the government's latest efforts to woo the grey vote with the pension reforms, I would not bet against them directing the FCA to sink its fangs into these dodgy old contracts, which may result in these firms paying out vast compensation sums.

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  2. Perhaps, but these were not mis-sold by the usual sense of the phrase.

    The benefits were clear at point of purchase: 100k buys you 5k year or similar. People chose not to exercise their right to go to the market to get a slightly better deal, and because few did, in a chicken and egg situation, the default deals offered had no pressure to improve.

    I'm with the DIY Income Investor here - not least because his last tip in this line, Chesnara, paid off handsomely.

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