Since Esure has traded at a relatively low valuation in recent months, a bid approach is not a major surprise. With Saga (LSE: SAGA) appearing to offer a wide margin of safety, it could realistically become a bid target over the medium term.

Improving performance

Alongside the bid approach, Esure released interim results on Tuesday. They showed that the company’s gross written premiums increased by 12% to £440.3m, with in-force policies up by 8.5% to 2.449m. Profit before tax was down from £45.1m in the first half of 2017 to £36.1m in the first half of 2018. However, this includes an impact of £14m from adverse weather-related claims costs in the home and motor accounts. Excluding those items means that profit before tax was £50.1m.

Overall, the performance of the company continues to be positive. But even at an offer price of 280p per share, the stock seems to be relatively undervalued. It puts the company on a price-to-earnings (P/E) ratio of 14.3 for the current year. And with a bottom line that is due to rise by 15% next year, a price-to-earnings growth (PEG) ratio of 1 suggests that the buyers of Esure may be getting a bargain.

Bid potential

As mentioned, Saga could become a bid target due in part to its low valuation. The over-50s travel and insurance specialist trades on a P/E ratio of around 10, which suggests that it offers a wide margin of safety.

Of course, the company has experienced a difficult period in the last year. Its financial performance has disappointed, with a profit warning providing evidence of difficult market conditions as well as scope for operational improvement. It is now targeting investment in customer growth, and a recent update suggested that it is performing in line with expectations. Despite competitive insurance markets, it is delivering growth in insurance policies. Similarly, demand for its tour bookings remains relatively robust.

With Saga due to return to positive earnings growth next year, the company’s outlook appears to be improving. Although there is still some way to go with its turnaround, it now appears to have a stronger growth strategy than in the recent past. With such a low valuation and the potential for a tailwind due to an ageing population, it would be unsurprising for the company to become of greater interest to potential buyers over the medium term. And even if it doesn’t, its investment potential remains high.

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Peter Stephens owns shares of Saga. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

As such, many investors may be considering a switch of at least part of their portfolios to the mid-cap index. This could prove to be a sound move – especially for investors who are able to buy and hold over a multi-year time period.

With that in mind, here are two FTSE 250 stocks which seem to offer a mix of income, growth and value potential. They could deliver impressive total returns in the long run.

Impressive performance

Thursday saw insurance company Esure (LSE: ESUR) releasing a first quarter trading update. The business was able to increase gross written premiums by 18% versus the same period of the prior year. There was strong growth in Motor, with gross written premiums rising by 21.1%. And while the Home segment suffered from challenging weather conditions, after adjusting for them, the group remains on track to deliver a similar combined operating ratio to 2017.

Looking ahead, Esure is forecast to post a rise in its bottom line of 11% in each of the next two financial years. Despite an impressive growth outlook, it trades on a price-to-earnings growth (PEG) ratio of just 1, which suggests that it could be undervalued at the present time.

In addition to a positive growth outlook, the company also offers a sound income future. It has a dividend yield of 6.5% at the present time. With dividends being covered around 1.5 times by profit, there seems to be scope for them to rise at a brisk pace. This mix of income, growth and value potential could mark Esure out as a strong investment opportunity within the FTSE 250.

Improving performance

Also offering a favourable risk/reward ratio at the present time is housebuilder Bovis (LSE: BVS). The company has experienced a tough period, with customer redress costing it both financially and in terms of its reputation. However, under a new CEO and with a refreshed strategy, the company appears to be making a solid comeback which could catalyse its share price performance.

For example, in the next two financial years it is expected to report a rise in its bottom line of 40% and 14%. These figures suggest that at a time when many of the firm’s sector peers are experiencing modest earnings growth, Bovis could deliver a much stronger outlook for its investors. And since it trades on a PEG ratio of 0.4, it seems to offer a wide margin of safety in case external challenges increase.

The company’s dividend yield of 8.2% is one of the highest in the FTSE 250 at the present time. While there are income shares which offer greater certainty and less risk, the return potential on offer from Bovis means that it could be a worthwhile buy for the long term.

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Sure enough

Sales at motor and home insurer Esure (LSE: ESUR) have risen by 36% to £781.3m since the group’s flotation in 2013. But tough market conditions mean that profits have stagnated over the last five years.

Indeed, last year’s after-tax profit of £80.4m was actually lower than the £93.2m earned by the group in 2013. As a result of this weaker performance, the firm’s share price has fallen by more than 25% since July, returning to its IPO level of about 215p.

I think this could be a buying opportunity. The company’s finances remains in good health and earnings per share are expected to rise by around 10% in both 2018 and 2019.

With the stock trading on just 10 times forecast earnings, I think any improvement in profits should be reflected in a rising share price.

Analysts also expect the firm to pay out 14.2p per share in dividends this year, giving Esure a prospective yield of 6.6%. I rate the shares as a buy.

What a Saga

At the time of Saga’s profit warning in December, I cautioned that “I don’t see any need to rush in here”. This view proved correct, as the shares then fell by a further 23%, hitting a 52-week low of 108p in March.

The Saga share price has since risen by around 15%, but at 125p, the stock is still worth about 30% less than at the start of December. Last week’s results gave us a much-needed opportunity to learn more about the state of the firm’s finances.

The news was mostly good, in my opinion. Pre-tax profit from continuing operations fell by 7.6% to £178.7m, mainly due to lower profits from insurance. But profits from travel operations rose by 36.9% to £20.4m, giving some credibility to the firm’s plans to increase travel profits “four or five times” by 2022.

The full-year dividend was increased by 5.9% to 9p, rewarding shareholders who’ve held onto the stock.

What happens next?

Saga’s hope is that profit from travel and other services will continue to rise, reducing its dependence on insurance.

The group is developing a loyalty programme to encourage customers to buy more than one service from the firm and also plans to spend £10m on extra marketing in 2018. According to last week’s results, this is already generating results. Sales of new motor and home insurance policies have risen by 17.7% and 9.2% respectively, so far this year.

Good fundamentals

My reading of last week’s figures is that Saga remains in quite good financial health. Last year’s free cash flow of £125m covered the £98.8m dividend payout comfortably, and net debt fell by £32.9m to £432m.

If the group can maintain stable insurance profits and continue to increase profits from travel, then I believe the dividend should remain affordable at its current level.

Saga shares now trade on a forecast P/E of 9.2 with a prospective yield of 7.2%. After reviewing last week’s figures, I’d be happy to buy.

The post Why Saga’s 7% dividend yield could be the buy of the decade appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Esure

Esure (LON: ESUR) is a provider of motor and home insurance products, that operates through two key brands – esure and Sheilas’ Wheels. Since floating in 2013, the insurer has paid its shareholders some very generous dividend payments. Last year, the group paid 13.5p per share, a yield of 5.2% at the current share price. Does that make Esure a good income stock? I’m not so sure.

Analysing the group’s last three dividend payments, it becomes clear that it operates a slightly unorthodox dividend policy. Its full-year dividends often include a ‘special’ one.

For example, the FY2016 and FY2015 dividend payments were 13.5p and 11.5p per share. Both of these payouts represented 70% of the group’s underlying earnings per share, and both comprised a base dividend of 50% and a special one of 20%. The FY2014 payout of 16.8p was 85% of the group’s underlying earnings per share. That comprised a base dividend of 50% and a special of 35%.

If we strip out the specials, the regular dividends paid were:

2016: 9.6p
2015: 8.2p
2014: 9.9p

Two issues come to mind looking at these figures. First, the yield is much lower. Last year’s payment of 9.6p was a yield of just 3.7%. Second, in 2015, the regular dividend was reduced. That’s not ideal from a dividend investing perspective, because ideally, income investors want to see a consistent pattern of dividend growth.

While Esure looks reasonably priced on a forward P/E ratio of 14.4, personally, I’d be hesitant to invest in the company for its dividend. I prefer to invest in companies that can demonstrate long-term track records of consistent dividend growth.

Amazing dividend track record

One such company that does have a fantastic long-term dividend growth record is Greene King (LSE: GNK).

Shares in the pub owner are heavily out of favour at the moment, having fallen from 980p in late 2015, to just 540p today, a decline of 45%. Has that fall created an opportunity for long-term investors? Quite possibly, in my view.

Last year, Greene King paid its shareholders dividends of 33.2p per share. That’s a yield of 6.1% at the current share price. On adjusted earnings per share of 70.8p, coverage was a healthy 2.1 times.

While some data providers’ records suggest that Greene King cut its payout in 2006 and in 2009/10, a deeper analysis of the company’s dividend history reveals a different picture. Indeed, if we account for a 2-for-1 share split in 2006 and a rights issue in 2009, the dividend wasn’t cut at all. The pub owner has increased its payout every year since 1997, an amazing achievement.

While the hospitality industry is no doubt going through a challenging period right now, as a result of Brexit uncertainty, muted consumer spending, and increased cost pressures, I believe shares in Greene King now offer excellent value for long-term investors. The stock trades on a P/E of under 8, and with a very generous dividend yield on offer, investors get paid to wait for a pick-up in the trading environment.

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Edward Sheldon owns shares in Greene King. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

The stock was last 3% lower from the mid-week close, but I would not consider today’s results as a sound reason to cash out. Indeed, it is no surprise to see investors pause for breath given the insurer’s strong share price progress in recent months.

eSure announced today that gross written premiums stomped 22.8% higher during January-June, to £393.3m, while pre-tax profit climbed 44.6% to £45.1m.

The result led chief executive Stuart Vann to say: “I am delighted with our performance in the first half of 2017. We have delivered strong growth in premiums, policies and profits as the success and momentum of our footprint expansion programme and disciplined underwriting continues to drive the business forward.”

He added that “in Motor, we are growing across all our customer segments, demonstrating the value and service proposition we offer to customers.”

At its car insurance division, eSure saw gross written premiums pound 27.4% higher, to £351.3m, while the number of in-force policies rose 16.4% to 1.74m.

This bubbly half-year result has prompted the Reigate-based business to lift its guidance for the full year. In March eSure said that it expected premiums growth of between 15% and 20%, and in-force policies to see a rise of between 5% and 10%. The company now “expects to deliver results at the positive end of this guidance,” it said.

Upgrades around the corner?

Its excellent performance and strong balance sheet (its solvency ratio stood at 153% as of June) in the year to date has encouraged eSure to lift the interim dividend to 4.1p per share from 3p a year earlier, comprising a 2.9p base payout and a 1.2p special dividend.

City brokers are already expecting a dividend of 11.6p per share in 2017, resulting in a hefty 4.1% yield. But given its encouraging capital position and improving momentum, I reckon this projection — along with eSure’s predicted 24% earnings rise — could be in line for upgrades in the weeks and months ahead.

Bargains beauty

Budget retailer B&M European Retail (LSE: BME) is another dividend stock I think deserves serious consideration right now.

Those expecting blistering yields may be left disappointed. But those seeking meaty dividend expansion year after year need to give the retailer a close look, in my opinion — as well as benefitting from rising pressure on shoppers’ wallets, lighting up demand for its low-cost wares, B&M’s store expansion drive in the UK and Germany promises to light a fire under earnings growth.

The City is expecting bottom-line expansion of 16% in the year to March 2018, a result which should drag the dividend from 5.8p per share last year to 6.9p. This estimate yields a handy-if-unspectacular 1.9%.

B&M reported last month that revenues roared 18.3% higher during the first fiscal quarter, with UK like-for-like sales swelling 7.3%. But not content to rest on its laurels, the Liverpool firm pounced on discount convenience store operator Heron Food Group this week to give the top line an extra kick. I reckon there is plenty of reason to expect profits, and also dividends, to continue pumping higher.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Improving performance

Reporting on Thursday was insurer Esure (LSE: ESUR). It has gone from strength-to-strength since its demerger of GoCompare last year. It has left the business leaner and more focused, which is evidenced by its improving financial performance.

For example, in the first quarter of the year the company recorded a rise in gross written premiums of 24.1%. This was despite some weakness in its Home division, where gross written premiums declined by 4.5%. Due to this, the company has decided to temper its growth in home insurance, since market conditions do not currently present opportunities for profitable growth. By contrast, the Motor division recorded a rise of 29%, which indicates a buoyant market after a change to the Ogden discount rate.

Looking ahead, Esure is expected to grow its earnings by 12% in the next financial year. This puts its shares on a price-to-earnings growth (PEG) ratio of just one, which indicates there may be considerable upside potential on offer. Since the company offers a yield of 4.5% from a dividend which is covered 1.5 times by profit, it could become an increasingly popular income stock in the medium term.

Growth potential

Also making changes to its business model in recent years has been RSA Insurance (LSE: RSA). The company has made numerous asset disposals as part of a major restructuring aimed at reducing risks and improving its capital resilience. According to its first-quarter update which was released on Thursday, its turnaround is nearing completion. It has disposed of UK legacy operations and its entire focus is now on its drive for outperformance.

Evidence of its improving performance includes a 14% rise in group net written premiums when compared to the first quarter of 2016. Furthermore, the company’s operating profit in the first quarter was ahead of its plans, while its underwriting performance was also impressive.

Looking ahead, RSA is forecast to record a rise in its bottom line of 8% in the current year. It is due to follow this up with growth of 17% next year. This puts it on a PEG ratio of just 0.7 and means a higher dividend may be affordable. In fact, the company is expected to increase shareholder payouts by 84% during the next two years. This puts it on a forward dividend yield of 4.8%, which suggests now may be the perfect time to buy it.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

It’s been a good week for investors in Esur (LSE: ESUR) as their shares have jumped over 12% in the past five days after the insurer posted stellar full-year 2016 results. A great year of trading for the online-only firm saw its operating profits rise 18% year-on-year and allowed it to raise full-year dividends by 17%.

Including the latest increase, shareholders of Esur are now receiving a 5.8% dividend yield annually and I believe there’s room for already-impressive shareholder returns to improve in the coming years. For one, growing earnings still covered this past year’s dividend 1.4 times over.

Another factor in my thinking is that the firm is in full growth mode, targeting an increase in policies in force from 2.1m in 2016 to 3m by 2020. If the group can do this while maintaining tight control over policy standards there’s every reason to believe profits can grow by an even larger margin as benefits of scale kick in.

One thing for investors to watch closely is whether or not the company’s expansion into home insurance proves as profitable as its core motor insurance business has been. The home insurance market is still relatively small for Esur, representing just 14% of total policies written when measured by value, but it represents a massive growth market for the company to target.

With growth opportunities ahead, a sane dividend policy that sees 50% of post-tax profits returned to shareholders, and the ever-present potential for further special dividends if its capital position remains strong, I reckon Esur will continue to bring joy to income investors in the years to come.

A safer option? 

A more under-the-radar option for dividend-hungry investors is replacement window and door manufacturer Safestyle (LSE: SFE). The AIM-listed firm may not be well known but its well-covered and growing 3.5% yielding dividend certainly piques my interest.

That’s largely because the company isn’t just a low-growth income option but is also growing sales and profits at a rapid clip by taking market share in the very fragmented market in which it operates. Revenue grew 9.8% year-on-year in 2016 thanks to price increases and 4.7% year-on-year increase in the number of window and door installations carried out.

There’s good reason to expect this solid performance to continue as at the end of H1, the company’s market share was only 10%, but has been steadily growing. This market share growth is being driven by its expansion out of its core northern and midlands markets into the wealthier south of the country.

Also attractive is the highly cash generative nature of the business that generated £8m in net cash from operations in H1 from £83.5m in sales. This has allowed the company to keep a cash-heavy balance sheet with £13.5m in the bank at year-end even as it expands its manufacturing facility and moves into new markets.

With shares trading at a cheap 15 times forward earnings while offering high growth potential and rising dividends, I believe Safestyle is a very attractive growth and income option.

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Ian Pierce has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Improving performance

The company in question is motor and home insurance specialist Esure (LSE: ESUR). It recorded a rise in gross written premiums of 19% in 2016, with in-force policies up 8.6% to 2.174m. This enabled it to post a rise in underlying profit after tax of 18%, which pushed total dividends higher by 2p per share to 13.5p. This means that the company now has a payout ratio of 70% of underlying earnings per share, which is inclusive of a 20% special dividend.

Esure’s combined operating ratio increased by 1 percentage point to 98.8%, while the business appears to have a strong capital position. Its Group coverage stands at 149% versus 123% last year and with the demerger of GoCompare.com having been successfully completed, it seems to be well-placed to deliver improving financial performance in future years.

Growth potential

While Esure’s earnings are due to fall by 13% in 2017, the company is forecast to return to positive growth in 2018. Its bottom line is expected to move 8% higher next year, which indicates that investor sentiment could begin to improve. This has the potential to push the company’s price-to-earnings (P/E) ratio higher than its current level. Since it trades on a P/E ratio of 12.4 versus a historic average of 22.6 over the last four years, an upward re-rating seems to be relatively likely.

If Esure was to revert to its historic average P/E ratio and meet its forecasts for the next two years, its shares could be trading as much as 72% higher than they are today. Clearly, this is an ambitious target, so investors may wish to include a margin of safety in case the company’s outlook is downgraded. As such, a capital gain in excess of 30% by 2019 does not appear to be overly optimistic.

Sector potential

While Esure could prove to be a strong buy for the medium term, sector peer Admiral (LSE: ADM) could offer even greater growth potential between now and 2019. It is forecast to record a rise in its bottom line of 37% in the current year. This puts its shares on a price-to-earnings growth (PEG) ratio of just 0.5, which compares favourably to Esure’s PEG ratio of 1.4. As such, there seems to be a wider margin of safety on offer with Admiral’s shares when compared to those of its sector peer.

Furthermore, Admiral currently yields 5.9%. This is 0.2% higher than its sector peer’s yield and since Admiral has a track record of relatively stable dividends, it could prove to be the more reliable dividend stock in the long run. Both companies could suffer from changes to the personal injury discount rate in the short term, but they seem to offer strong growth prospects for the long term.

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The discount — or interest — rate used to calculate compensation payouts will be cut from 2.5% to -0.75%, to reflect the fall in inflation-linked government bond yields since 2001, when it was last revised.

The effect of the change will be to increase the amount insurers have to pay claimants to reflect today’s lower interest rates. But the cut is bigger than most insurers expected.

As far as I know, there aren’t any retail savings products offering negative interest rates. So insurers were hoping that the cut would be more reflective of conditions in the retail savings market, rather than the government bond market.

The government has now promised a review of the way that this rate is calculated. I suspect further changes are likely.

In the meantime, investors in firms such as Direct Line Insurance Group (LSE: DLG) could see dividend growth come under pressure. Should you buy, sell or hold after today’s news?

Profit down by a third

Direct Line is today’s biggest faller in the insurance sector, down by 7.6% to 336p at the time of writing. The group said that the impact of the -0.75% rate on its 2016 results would be to reduce pre-tax profit by between £215m and £230m.

Pre-profit during the first half of the year was £298m, so assuming a similar performance during the second half this means pre-tax profit will be down by about one third.

The group’s Solvency II capital coverage ratio, a key regulatory measure, would also fall “towards the higher end of the Group’s target range of 140-180%” before dividends. So dividend growth might slow.

Direct Line looks heavily exposed following today’s news, but the bad news is probably in the price. I’d hold.

Results on hold

Admiral Group (LSE: ADM) will postpone its full-year results until 8 March in order to fully calculate the impact of today’s change.

The firm says that the impact of existing claims settling at the new rate is expected to be between £140m and £175m. Admiral’s 2016 reported profit will be £70m-£100m lower than expected.

However, the group is confident that the insurance market will adjust its pricing so that premium rates reflect this higher level of payout. Admiral believes “there will be no significant impact on future business and its profitability”.

The group’s shares are only down by 2.7% today, so the market seems confident in Admiral’s judgement. I’d hold until we know more.

This stock has risen today

Insurance peer Esure Group (LSE: ESUR) is one of today’s winners. The firm’s shares rose by 2.8% after the group reminded investors that it had already budgeted for a cut to 0%.

Esure’s management say that today’s changes will only reduce the firm’s reserve margin by £1m. The group is still confident that 2016 profits will be “ahead of market expectations” thanks to strong investment returns last year.

The firm’s shares trade on a forecast P/E of about 13.5, with a prospective yield of 4.7%. I’m encouraged by Esure’s prudent approach to this change and attracted to its modest valuation. I’d be happy to buy at current levels.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Wide margin of safety

House builder Crest Nicholson (LSE: CRST) faces an uncertain future. Brexit has caused sterling to weaken, which is pushing inflation higher. As such, the affordability of mortgages could come under threat as wages struggle to keep pace with rising prices.

Despite this, the company’s future as an investment appears to be sound. The market seems to have factored-in potential Brexit woes, with Crest Nicholson having a price-to-earnings (P/E) ratio of just 7.8. And with earnings growth forecast to be 9% this year and 10% next year, even a downgrade to its current outlook could see it perform well relative to its sector peers.

Even though the housing market faces a difficult future, Crest Nicolson’s dividend growth forecasts remain high. It is expected to record a rise in shareholder payouts of 38% during the next two financial years. This means that it could be yielding as much as 7.2% in 2018, which is around twice the FTSE 100’s current yield. Given this high yield and its low valuation, Crest Nicholson seems to be a highly attractive purchase for investors seeking a mix of income returns and capital growth potential.

Dividend growth potential

Also offering dividend growth potential is insurance company Esure (LSE: ESUR). Its bottom line is forecast to rise by 32% in the current year, followed by further growth of 8% next year. This is ahead of the wider market’s growth rate and should enable the motor and home insurance specialist to deliver strong dividend growth during the period.

In fact, shareholder payouts are expected to rise at an annualised rate of 13% during the next two years. This should prove to be well above inflation and puts Esure on a forward yield of 5.7%. Its dividend payout ratio is expected to remain relatively comfortable. Even after the planned rise in dividends, profit is due to cover shareholder payouts around 1.5 times. This indicates that dividends could grow at a similar pace to net profit over the medium term without putting the company under financial strain.

Esure currently trades on a P/E ratio of 12.5. This indicates there is upward re-rating potential – especially since it has such promising growth prospects. Certainly, its shares could become increasingly volatile as the momentum towards Brexit builds. However, with a wide margin of safety, low valuation, fast-growing dividends and a high yield, now could be the right time to buy it for the long term.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.