Why I’d buy Prudential plc along with this 6% yielder

Alan Oscroft — Wed, 21 Mar 2018 12:20:26 +0000

The ‘boring but safe’ picture of the insurance world was shattered by the financial crisis, when some respected big names were badly overstretched and had to slash their dividends.

But nothing like that happened to the well-named Prudential (LSE: PRU), which has always kept its dividend yields modest but very well covered, and has maintained a healthy low-risk balance sheet. And though shareholders only pocketed a 2.5% yield last year, there are two factors that I think make Prudential a great investment.

One is its steadily growing earnings which have contributed to a climbing share price. EPS has soared by 60% over the past four years, leading to a share price rise that has left the FTSE 100 in its wake — Prudential shares are up 80% over five years, with the Footsie up only 12%.

Beating inflation

Then there’s the progressive nature of the dividend, which has seen the annual payment rocket by 40% between 2013 and 2017. That’s way ahead of inflation, and analysts predict further progressive rises.

With full-year results delivered last week, the Pru said its “capital generation is underpinned by our large and growing in-force business portfolio, and focus on profitable, short-payback business.” And that makes me happy the cash will keep flowing.

The big news is that the firm is to capitalise on its success in Asian markets by splitting itself into two — M&G Prudential focusing on the UK and Europe, and Prudential PLC to continue business in Asia, the US and Africa.

With the shares on forward P/E multiples of only around 11.5 to 12.5, I’d be happy to hold the existing Prudential today, and I’d be just as happy to own shares in the two demerged companies.

Big yield

In many ways, Personal Group Holdings (LSE: PGH) is quite a contrast to Prudential. Its share price hasn’t done anywhere near as well recently, barely beating the FTSE 100 over five years with a 14% gain. But it’s been paying a significantly higher dividend, with yields breaking 6%.

The firm provides employee benefits, including short-term accident and health insurance, and counts Royal Mail Group as a high-profile customer.

Revenue for 2017 declined from £53.6m to £45.2m, but that was expected and was due to the delayed roll out of its salary sacrifice scheme at Royal Mail (due to an HMRC review of salary sacrifice).

That led to a modest drop in EBITDA, from £11.4m to £10.8m, but that was better than expectations. And Personal Group ended the year with a healthy rise in cash on its books, up from £12.6m to £16.2m, and with no debt.

Cash cow

The dividend was lifted by 3.2% to 22.7p per share, for that yield of 6% on Tuesday’s close of 377p.

Impressive though the company’s progress has been, I reckon it could be only beginning to tap its long-term growth potential. Chief executive Mark Scanlon spoke of “the significant opportunity presented by the employee services market, which is being driven by increasing competition for staff in a tight labour market and recognition of the commercial value of investing in and retaining staff.“

When my colleague Rupert Hargreaves spoke about the company in January, the shares were on a forward P/E of 18, but since then the share price has retreated to drop that ratio 15.7. I think that’s good value for a 6% yielder with tempting growth potential.

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Alan Oscroft 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.

These two high-growth small-cap stocks are just getting started

Rupert Hargreaves — Mon, 29 Jan 2018 12:00:39 +0000

Over the past seven years, producer of natural feed additives for animal health and nutrition Anpario (LSE: ANP) has emerged as one of London’s top growth stocks. Indeed, since the beginning of 2011, shares in the company have produced a return for investors of 430% as net profit has expanded at a rate of around 10% per annum over the same period.

Just getting started

It looks as if Anpario’s growth story is only just getting started. Even though earnings per share are expected to fall by 1% for 2017 (according to the current City consensus) earnings are expected to grow 16% over the next two years to 19.4p by 2019.

The one downside is that due to the firm’s explosive past growth, the shares are expensive. They currently trade at a forward P/E of 29. Nevertheless, according to a trading update published today, at the end of 2017, the company had a net cash balance of £13.6m, around 12% of its current market cap. Stripping out this cash (approximately 59p per share) gives a forward P/E of 24. This might seem like a high multiple, however compared to the likes of Anpario’s US-listed peer Neogen, which trades at a forward P/E of 54, Anpario appears to be the cheaper bet.

Going forward, the demand for the company’s products should only grow as the world’s population demands more food. As long as the business continues to reinvest in its offering, earnings should continue to expand along with the firm’s cash balance, and with this being the case, I believe Anpario’s growth is only just getting started.

Growth and income

Financial services company Personal Group (LSE: PGH) is another small-cap growth stock that I believe is only just getting started. This business provides employee benefits to workers, such as short-term accident and health insurance. Demand for these services has grown rapidly over the past five years and Personal’s revenue has doubled during this period.

Management expects this trend to continue. In a trading update published at the end of October, CEO Mark Scanlon commented that Personal is “better placed than ever as we enter 2018” as its core business, coupled with new initiatives should help it win contracts from new customers. Indeed, City analysts are expecting earnings per share growth of 7.4% for 2018 off the back of revenue growth of 44%.

Like Anpario, Personal also has a robust balance sheet, with “cash and deposits of £16.5m and no debt” reported at the end of the first half of 2017. On this basis, cash currently accounts for around 11% of the firm’s current market value.

Such a hefty cash balance backs up the company’s dividend yield of 4.9%, which is costing around £7m per annum but is easily covered by cash generated from operations.

The one downside to Personal is, once again, the stock’s valuation. At the time of writing the shares are trading at a forward P/E of 18.2, which might put some investors off. But considering the company’s historical growth record, coupled with its future growth potential, I believe that it’s worth paying a premium to buy into Personal’s story.

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