Southern discomfort

Credit agency S&P has just cut South Africa’s sovereign rating to junk status. Three large UK companies with links to the politically troubled country could get caught in the fallout: asset manager Investec (LSE: INVP), insurer Old Mutual (LSE: OML) and private healthcare group Mediclinic International (LSE: MDC).

The downgrade followed South African President Jacob Zuma’s controversial cabinet shake-up last Thursday, which saw the removal of widely-respected former finance minister Pravin Gordhan. The country’s troubles are beginning to make people nervous, and the ratings downgrade only makes matters worse. The rand has also plummeted, along with government bonds, with yields now topping 9%.

Mutual destruction

Shares in Old Mutual were down a hefty 6.22% to 203.4p each at one point this morning, while Investec’s stock plunged a whopping 9.77% to 545p, although both have since stabilised. However, expect further uncertainty ahead, with ratings agency Moody’s warning of another likely downgrade, after expressing concerns over the timing and scope of the reshuffle.

It has been a painful few days for all three, with Investec and Mediclinic both down more than 7% over the last week, and Old Mutual down almost 9%. They already had enough problems on their plate.

Troubled times

Mediclinic has had a tough time since merging with Abu Dhabi-based FTSE 250 firm Al Noor Hospitals and joining the FTSE 100 last year, falling 20% over 12 months, as earnings and revenues in its Abu Dhabi business dipped. Broker Macquarie has just downgraded it to neutral, warning of a continuing tough business environment in the UAE, difficult trading in South Africa and regulatory risks in Switzerland. Trading at 19.36 times earnings and yielding 0.76%, I cannot imagine many investors looking to put money into MediClinic right now.

Investec’s performance has been patchy for years, and it still trades well below pre-financial crisis highs. In mid-March, the FTSE 250 wealth manager was heralding a comfortable rise in full-year operating profits and revenues, aided by the stock market recovery. However, it faces uncertainty in both South Africa and the UK, expressing concerns over a hard Brexit. Some of that may be priced-into its valuation of 13.16 times earnings, while the 3.87% yield is tempting. Forecast earnings per share growth of 16% and 8% over the next couple of years suggest the future may be brighter.

Breaking up

I remain wary about Old Mutual, which has been warning of uncertainty in all three of its main markets, South Africa, the US and UK. It is also going through a strategic overhaul, breaking the company into its four constituent parts, Old Mutual Emerging Markets, Old Mutual Wealth, Nedbank Group and OM Asset Management. This only adds to the sense of uncertainty. I would steer clear even at today’s valuation of 10.23 times earnings, and yield of 3.07%, especially with Zuma now facing opposition attempts to unseat him.

The post Could South Africa’s junk status trash these 3 stocks? appeared first on The Twelfth Magpie.

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Harvey Jones 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.

Dependable Insurance

Old Mutual (LSE: OML) has been steady and dependable over the past decade and more, and while the shares have been up and down a bit through times like the financial crisis, the insurer has kept on handing out decent dividends every year.

Having said that, the dividend was reduced for full-year 2016, from 8.9p in 2015 to 6.1p. But that was expected, as the company had already told us it would be taking a “conservative approach” to dividends as it adjusted to a new capital management policy.

For the long term, I think that’s a good move, and progressive increases from the new base level are predicted to reach 8p again by 2018, for a yield of 3.6% on the current share price of 223p.

Adjusted profits and EPS were broadly flat, with funds under management up 30% to £394.9bn, adjusted NAV up and debt down — and I don’t see any justification for the minor sell-off that lopped 2.7% off the share price in morning trading.

There’s still risk in Old Mutual’s focus on South Africa, and the planned break-up of the company into its constituent four parts scheduled for the end of 2018 means there’s going to be an uncertain patch ahead. But chief executive Bruce Hemphill said: “We are confident that the managed separation will unlock and deliver long-term shareholder value“.

And I see a forward P/E for 2017 of 11, coupled with a low PEG of 0.7, as indicative of a good long-term investment here.

Sector champion?

RSA Insurance (LSE: RSA) is a long-term favourite of mine, and I’ve owned the shares in the past. In fact, I’d actually have done better sticking with RSA than going for Aviva these days, with RSA shares up more than 50% since the start of 2016, to 593p.

RSA Insurance suffered in the aftermath of the financial crisis too, and was forced to slash its dividend as low as just 2p per share in 2014 (for a 0.5% yield). But the annual payout bounced back in 2015, and 2016 has just seen a further 52% hike to 16p per share. That’s a 2.7% yield on the current share price, with forecasts suggesting a rise as high as 4.9% by 2018.

We’d also be looking at a modest P/E of around 11.5 by then, with a PEG ratio of an attractive 0.7, so is RSA another good one to stash away in your ISA portfolio now?

I think it clearly is, especially with Stephen Hester at the helm since 2014. Along with 2016 results, Mr Hester reckoned the company was “delivering high quality sustainable results“. He spoke of an ambition to “drive RSA’s performance towards ‘best in class’ levels“.

Market conditions are almost certain to remain tough over the next few years, but I see most of our insurance sector as in the best shape it’s been for years — capital management and liquidity have been shorn of their gung-ho characteristics from recent years of exuberance, and I see a much better managed industry now.

And RSA Insurance, which I reckon really is close to ‘best in class’, should serve investors well in the decades to come.

The post Why Old Mutual plc is a great pick for your ISA appeared first on The Twelfth Magpie.

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Alan Oscroft owns shares of Aviva. 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.

Living Aviva loca

Insurance giant Aviva (LSE: AV) offers a nifty income stream of 4.53%. Better still, the income prospects look good, with the yield forecast to hit 5.1% at the end of this year. Nothing is certain when it comes to investing, and current dividend cover of 1.1 is on the low side. Aviva cut its dividend by half in August 2013, so it has form on this front, but cover is forecast to rise to 1.8, giving investors a much greater degree of security.

The stock took a bashing after Brexit, but it has recovered strongly since. This suggests it could be vulnerable once Theresa May triggers Article 50, and of course insurance companies are exposed to stock market turmoil. On the plus side, this means it could benefit from a Trump reflation. Forecast earnings per share (EPS) growth of 80% this year and 16% in 2017 look promising, pushing the forecast yield to a tempting 5.8% by 31 December 2017. 

Plug into National Grid

Multinational electricity and gas utility National Grid (LSE: NG) has been my favourite utility for some time, but lately it has lost some of its sizzle. The share price is down 15% in the last three months, with investors cooling on the stock after this month’s disappointing half-year report. Adjusted operating profit increased by just 1%, and that was after favourable exchange rate movements and payment timings. Sterling weakness drove up the cost of its dollar-denominated debt, which jumped from £25.3bn to £29.2bn over the period.

None of this worries me. National Grid owns and operates vital electricity and gas infrastructure across the UK and parts of the US, and barriers to entry are high or insurmountable. It has reliable, regulated revenues and can therefore borrow cheaply. Its handsome 4.8% yield is covered 1.5 times, which should be solid enough. Dividend growth is likely to be slow, but the recent share price dip looks like a buying opportunity for long-term income seekers.

The feeling is Old Mutual

South Africa-focused insurer Old Mutual (LSE: OML) is another steady dividend stock, but its current yield of 4.67% has a sting in the tail. Profits have been hit by currency and stock market fluctuations, and the outlook is further complicated by plans to split the business into four different entities. Although that has now been reduced to three, as it is set to delay listing its UK wealth management unit due to the mounting costs of upgrading its investment platform. It may simply be sold off instead.

Adjusted pre-tax profit slumped 22% between January and June, to £708m, amid uncertainty in its three largest markets of South Africa, UK and US. Alarmingly, the dividend is now forecast to fall to 3.4%, following a 9% dip in EPS across 2016. Trading at 9.9 times earning this could be a buying opportunity, but there are safer income sources out there today, including Aviva and National Grid.

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Harvey Jones doesn't own any of the stocks mentioned in this article. 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.

National treasure

Multinational electricity and gas utility National Grid (LSE: NG) combines the play-safe defensive attributes you would expect with an invigorating splash of offensive dash. Its share price is up almost 77% over the past five years, more than double the FTSE 100 return of around 30%. It has easily outpaced utility alternatives such as Centrica, which fell more than 20% over the same period.

I’m glad to see National Grid confirm my longstanding positive impression. It’s a highly regulated venture but this gives it plenty of stability in the shape of healthy forward visible earnings. It can also produce the occasional pleasant surprise, such as the recent decision by the US state of Massachusetts to grant price hikes for its 1.3m electricity distribution customers, which will deliver a $101m revenue boost.

The one sticking point is that it isn’t particularly cheap, trading at 17.3 times earnings, although few will complain given its solid prospects. Strong share price growth has suppressed the yield, which is currently 3.99%, hardly spectacular but again, nothing to grumble about in these low interest rate days. The future looks steady, with forecast earnings per share (EPS) growth of 1% in the year to March 2017, and 3% the year after. Revenues and profits look set to rise slowly and steadily as well. By 2018, the yield should have crept up to 4.2%. National Grid looks like solidity personified, and that’s a rare and attractive attribute these days.

Golden Oldie

FTSE 100-listed South African insurance group Old Mutual (LSE: OML) is often neglected by investors who are distracted by more visible UK rivals such as Aviva, but that has been a costly mistake. The stock is up 111% over the past five years and has performed pretty well in recent months as well.

This is particularly impressive given that it’s going through a major overhaul, which will see the business try to liberate value by splitting itself into four parts: Old Mutual Wealth, South African lender Nedbank, the South African Old Mutual Emerging Markets business and its US institutional asset management arm Old Mutual Asset Management. It has now exited all its continental European operations, ahead of a planned London flotation later this year. Reports suggest it may retreat from listing its UK wealth management arm, due to the mounting costs of upgrading its investment platform, and could opt for a sale instead.

2016 could be a bumpy year, with EPS forecast to fall 8%, but a forecast 15% rebound in 2017 could quickly ease worries. Today’s valuation of 10.7 times earnings certainly isn’t excessive, although the forecast yield of 3.3% disappoints compared to some of the income streams you can get today.

Old Mutual has exciting growth prospects in Africa but conversely, that could make it too risky for some investors, especially given recent Rand volatility. But it certainly merits your attention.

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Harvey Jones 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.

Cheap insurance

The EU referendum result is bad news for the UK economy in the medium term, but it’s been a boon for those of us who think insurance companies make for great investments. Take Old Mutual (LSE: OML) for example, an insurer whose shares are down 5% today to 194p, for no apparent good reason.

Immediately after the vote, Old Mutual shares lost 9% of their value, and though that wasn’t as bad as some of its peers, it was still an irrational reaction. Since that temporary dip, the shares have gained 15%, so it was a great opportunity for those who like to mop up when they see a knee-jerk panic. But after the recovery, is Old Mutual still a buy now?

Interim results released a couple of weeks ago painted an attractive picture, and we should be seeing a small fall in EPS this year, plus there’s a 15% rise on the cards for 2017. Being focused on South Africa, the UK and US, the EU thing shouldn’t be much of a headache, and P/E ratios of 11 and 10 for this year and next look good to me — especially with well-covered dividend yields of 3.5% and 3.9% pencilled-in.

Mining bottom?

The beginning of the year marked the turnaround point for the mining sector — at least, I’ll cautiously say it’s starting to look that way. If you’d got your timing right, Anglo American (LSE: AAL) would have almost quadrupled your money since the stock’s low point on 20 January, reaching 848p as I write. But as we know, timing is something that very few people are good at, and investing based on overall valuation is far more likely to bring success — so is Anglo American cheap now?

Well, the super-cheap days of early 2016 were a result of serious panic-driven overselling, so once again there was a ‘maximum pessimism’ opportunity to buy when the doomsters were selling. On that basis, I think this year’s meteoric rise is over. But with debt falling and commodity prices showing signs of a turnaround, I see Anglo American and the rest of the mining sector as good long-term value now.

Oversold financials?

The financial sector was hit especially hard by the Brexit vote, and we’ve seen specialist banking group Investec (LSE: INVP) dipping 6.4% today, to 461p. There has been a recovery since the immediate post-vote hit, but Investec shares are down 9% since 2016’s peak in April, and down 23% since 2015’s highest point.

The shares are now on a forward P/E of a pretty undemanding 10.4 for the year to March 2017, dropping to only 9.3 a year later, with forecast dividend yields of 4.6% and 5.1%, and those look like pretty attractive fundamentals. So why so cheap?

Investec does a lot of its business in South Africa, and that country’s current economic wobbles are weighing heavily on the valuation of its shares. But if you see South Africa as having solid long-term potential, as I do, then you might see these as bargain times.

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Severn-th heaven

Water utility Severn Trent (LSE: SVT) may not offer the juiciest yield on the FTSE 100, although 3.54% is respectable enough. But what it lacks in income it has delivered in growth: its share price is up a thirst-quenching 52% over the past five years, against just 3% growth for the FTSE 100 as a whole. That’s quite a spurt for a stock that’s primarily seen as a safe haven. Lucky number Severn.

Severn Trent has also justified its safe haven status: its performance chart shows a steady upward arc since the financial crisis. Full-year results, published yesterday, show the Midlands water and sewage provider making a “promising start” to its new regulatory period, with a 4% rise in underlying profit before tax to £314m, helped by cost savings and efficiencies. Disappointingly, it rebased its dividend by 5% this financial year and now only promises growth of RPI or above. With RPI currently at 1.3%, the dividends will flow, just don’t expect a torrent.

Mutual admiration

Insurer Old Mutual Group (LSE: OML) has battled against tough headwinds lately. Like every life company, it’s been exposed to global stock market volatility, but this has been aggravated by its focus on emerging markets, which have been particularly troubled. The share price is down 25% over the last year, slightly worse than other FTSE 100-listed insurers. Some might see this as a buying opportunity, with the valuation knocked down to just 9.18 times earnings and the yield a lively 4.97%.

Be prepared to hang on for the long term. Old Mutual recently announced plans to separate its four constituent businesses, but this is no panacea as earlier this month subsidiary OM Asset Management reported a 14.2% year-on-year drop in net income to $32m, as market volatility took its toll. Still, the overhaul will give Old Mutual a fresh face and make raising funds and capital markets easier. This should be a good stock to hold when markets recover. Until then, you have that near-5% yield.

The Scottish play

Management has positioned power giant SSE (LSE: SSE) as an electric long-term income play offering yields that typically nudge 6%. Today you get 5.82%. Share price performance has been patchy, with the stock down 7.61% in the last 12 months, although long-term buy-and-holders will be up 15% over five years. The lingering concern is that the dividend is at risk as cover gets stretched. Cover is currently 1.3, thin but not yet threadbare.

SSE recently posted a drop in full-year profits for the year to 31 March but lifted its dividend 1.1% to 89.4p per share. Low commodity prices and tougher competition from smaller utility suppliers are hurting, as more customers abandon the hated Big Six for smaller rivals. SSE shed 370,000 customers last year, although it clung onto 8.21m. Share price growth prospects may be less than sparky, but the dividend should continue to sizzle.

The post Which is the best income play: Severn Trent plc (3.54%), Old Mutual Group plc (4.97%) or SSE plc (5.91%)? appeared first on The Twelfth Magpie.

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Harvey Jones 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.