Insider: Loading up on Lloyds, RSA

Hester backs RSA with own fortune

Just as the market was absorbing strong first-quarter results, RSA Insurance chief executive Stephen Hester was stocking up on shares in the fast-recovering insurer. So happy is the former Royal Bank of Scotland boss that he's forked out almost £500,000 on 100,000 at 479.8p.

Hester's transformation of RSA, which he joined just months after a string of profits warnings at the back end of 2013, has been impressive, and Zurich's abandoned £5.6 billion bid last September at least demonstrated its attractiveness to potential suitors.

Net written premiums flat at £1.575 billion in the three months to March was certainly better than Barclays analyst Alan Devlin had expected, and underlying core premiums increased 8% year-on-year to £1.457 billion.

And, crucially, profits were decent, too. "Operating profits and net attributable profits for first-quarter were strong and ahead of our expectations," said the insurer.

"RSA was at one time a favourite of income funds, and we see no reason why it can't reclaim this crown in the future," reckons Devlin. "In the short term, restructuring costs, pension contributions and the impact of the pull to par will restrain dividends, but we expect special dividends to start by 2018, with a yield of 6.6% in 2018, increasing to 8.1% in 2019."

He thinks that if RSA is "even partially successful" on reaching its 2018 targets, there's upside of 20% to his 545p price target. "Our bull case valuation of 661p (40% upside) was based on the company hitting its 2018 ambitions," adds Devin. "While early days, the CEO said the company was 'on track' in this journey."

On current estimates, RSA shares trade on a recovery multiple of 36 times, but earnings per share (EPS) is tipped to almost triple in 2017 to 38p. Do that and the valuation multiple drops to a very palatable 12 times.

Lloyds low enough for this pair

A week after in-line first-quarter results, management bet that Lloyds Banking Groupshares remain cheap.

Independent director Sara Weller was first to pile in, spending almost £66,000 on 100,000 Lloyds shares at 65.745p.

Curiously, Weller sat on the board of Sainsbury's between 2002 and 2004, then ran Argos from 2004 to 2011. The grocer has, of course, just bought the catalogue retail chain for £1.4 billion.

Canny chairman Lord Blackwell dived in a day later. And that delay paid off, enabling the banking and insurance man to pick up his 50,000 shares almost a penny cheaper at 64.89p.

But could the shares get even cheaper? Of course, they could, and at 64p they're at an interesting level of technical support. Low interest rates are no good for lenders because they limit the yield they can generate from cash deposited by customers.

Jason Napier, an analyst at UBS, is unconcerned, however. He believes Lloyds will generate a total payout - including special dividend or buyback - of 5.75p this year, for a yield of 8.5%. The question now, he asks, is what a fair dividend yield for a low growth, highly profitable bank in the UK should be?

"At the 5% average yield at which Europe's banks currently trade, a dividend cut of at least 40% of our estimate is in the price, we think. We just don't think this is right. Given the long-term stability of returns in UK retail banking, we would look for Lloyds to return to a dividend yield under 5% when rates increase."

A small shift in Napier's EPS estimate for this year from 7.6p to 7.5p moves his price target to 86p from 88p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.