Why I have recently bought UK, European insurers
December 21, 2012
Scanning through the lists of European equity sectors to figure out where the strongest price momentum action has been in European equities, it is clear that the year-end equity market rally has been led by Financials, notably Banks and Insurance companies.
Now, there are lots of reasons why I am not terribly keen on buying Bank shares at the moment - perhaps I am prejudiced by the fact that I have recently been laid off by one of the Big 4 UK banks! But there are good fundamental reasons why I am not keen on them - the threat of new regulations hurting profitability (Vickers Commission, Basel III), low dividend yields as they need to keep cash rather than pay it out to shareholders, and the risk that there are more gremlins like the Libor fixing scandal still to come out of the woodwork.
So I focused my efforts on the insurers, which by and large are not subject to this long list of issues. So what was I looking for? I was looking for insurers that satisifed 4 key criteria:
1. Strong price momentum culminating in a share price breakout up and out of the previous trading range. A number of stocks satisfied this requirement.
2. High and sustainable dividend yield; again, not a real shortage of high yielders among insurers, with a payout ratio (dividends as a proportion of earnings) below 70%, to reduce any financial risk.
3. Cheap valuation - on valuation measures other than dividend yield, like price/book, a simple but interesting value measure for insurance companies.
4. An interesting business model (potential takeover candidate, strong emerging market exposure, dominant position in domestic market).
The result? I whittled down the European insurance sector to 3 names which I have put some of my hard-earned savings into -
Phoenix Group (PHNX) - a closed-fund UK life insurer offering a dividend yield well over 7%, a very low valuation and which I think could be a potential takeover candidate one day. The share price has recently been in a strong uptrend, and I think could esily spike to around 650p from the current 545p once it clears the obvious resistance level at just over 550p.
Euler & Hermes (ELE) - a French credit insurer that has strong price momentum, low price/book valuation and an attractive dividend yield. It recently broke to a new year high at EUR64, usually a good sign that it will make further gains ahead. I would look to at least 10% here plus the 7%+ dividend yield, giving total return potential not far from 20%.
CNP (CNP) - another French insurer, this time a life insurer that is big in France but also in Brazil, giving it an interesting emerging market growth flavour. Similar profile to Euler & Hermes in terms of dividend yield, price/book valuation and strong upwards price momentum. With this stock I would aim for at least the year high at EUR12.75 versus the recent EUR11.41 share price, plus again a 7%-odd dividend yield to collect in April next year.
Let's see how these stock picks get on in the weeks ahead... Now to find another sector or asset class with strong price momentum and solid fundamentals to invest in...