Chesnara happy to be an income stock

31st Aug 2011 12:07

A dividend hike at life assurance company Chesnara was not enough to stop shares sliding after first half profits fell dramatically.The firm proposed a 5.95p interim dividend per share, an increase of 2.6%, but this was overshadowed by pre-tax profits which fell to £3.8m from £12m the previous year on an IFRS (international financial reporting standards) basis.Earnings per share came in at 2.79p, down from 7.71p in 2010.The result was shares slipping 3% in morning trading following the announcement.Chief executive, Graham Kettleborough, blamed challenging equity and bond markets for the "mixed results"."The dominating investment market influence in the UK over the period has been the downward drift in short-term interest rates combined with an easing up in longer-term rates, while investment returns in Movestic, our Swedish-based business, have been negatively affected by poor equity and fixed-interest investment performance," he said.On a European Embedded Value (EEV) basis, Movestic suffered a £6.2m shortfall in the first half of the year, as the projected level of policyholder funds under management, on which its fee income is based, has fallen.Even on an IFRS-basis, the Swedish arm posted a pre-tax loss of £1.2m, but the trend is improving and Kettleborough told Sharecast that Movestic is projected to move into profit next year.The firm added that it could start acquiring rivals if new solvency rules designed to protect consumers are implemented in 2013.The Solvency II rules mean insurers could have to hold more capital to better reflect the risks they underwrite, something critics say could prove too onerous for smaller firms."We are on target [to meet Solvency II requirements] as far as we are concerned, but the requirements are a challenge for the industry and we expect this to throw up acquisition opportunities," Kettleborough explained.If the company does hit the acquisition trail, it is unlikely to be for an "open to new business" firm in the UK."You never say never, but the margins are very thin on open businesses in the UK," Kettleborough opined."We're more likely to look at Ireland, where the market is very fragmented. We'd look at offshore - Guernsey, Jersey - but we are seeing government protection increasing in some of the mainland countries," Kettleborough said, adding that the company had no pressing need to "do a deal for the sake of it".Keeping the company's generous dividend policy ticking along is of high importance to the board. The shares are yielding more than 7%, underlining the company's reputation as a dividend stock."We've been classed as a dividend stock ever since we floated [in 2004]," acknowledged finance director Ken Romney."We're not going to suddenly come up with a 10% increase in our dividend; steady, sustainable increases are more the name of the game," Romney told Sharecast.Broker Collins Stewart cut its recommendation on the stock to "hold" following the figures, and lowered its target price to 250p from 270p."Q2 [second quarter] was a disappointing quarter after a Q1 which raised our hopes that the worst was behind Sweden. We look for more clarity on turn-around in Sweden," Collins Stewart analyst Ben Cohen said.Panmure Gordon is sticking with its "buy" recommendation, however, citing resilient cash generation from the Countrywide Assured (CA) business, the cash cow that enables the company to maintain its dividend stream.The broker has cut its earnings per share forecasts for 2011, however, by 38% (IFRS-basis) and 50% (EEV-basis)."Trading at a 25% discount to the 30 June 296p EV [enterprise value] per share whilst yielding a highly attractive 7.6% we believe that the shares remain undervalued," Panmure's Barrie Cornes said."We believe that the cash generation which supports the dividend will remain resilient at least into the medium term even if investment markets remain difficult. On this basis we think that the 2011F [full-year] dividend yield of 7.6% should act as a floor under the share price. We maintain our Buy recommendation and 285p target price," the broker said.MM/JH