Aviva
Amount paid for Friends Life: £5.8bn
The abrupt fall in the share price of Aviva when the insurer unveiled its unexpected purchase of Friends Life in December always looked overdone, which is one reason why I chose the shares as one of my tips for 2015. The deal has completed and the company’s brokers, JP Morgan Cazenove and Morgan Stanley, are free to publish research again, along with the rival Barclays.
There are some punchy numbers out there. The deal probably makes even more sense today than it did in December. It establishes Aviva as one of the most high-yielding stocks in the UK life insurance sector, given the strength of the cashflow coming from the Friends business, in a market where yield is all.
Barclays points out that each one of the past three Aviva chief executives has cut the dividend, most recently Mark Wilson in March 2013. The acquisition of cash-generative Friends, though, will make Aviva a dividend stock again. The company has said that it can find £225 million in cost savings from crunching the businesses together, while the acquisition will generate an additional £600 million a year of cashflow. This means a forecast dividend of 29½p in 2017, putting the shares on a yield of 5.3 per cent.
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Yet Barclays sees no reason why Aviva should not pay out all of its forecast cash generation of £1.6 billion in 2017, or 40.7p a share, which would give a dividend yield of 7.3 per cent. This might seem over-optimistic, but it does suggest some upside to the shares, which were ahead by 6½p at 561½p at last night’s close. They have gained 17 per cent so far this year.
The Friends purchase means that there is no longer any question over Aviva’s balance sheet and therefore it should sail through the Solvency II requirements without the necessity to raise fresh capital, helped by the well-timed decision at the end of 2012 to exit America.
Aviva will brief the market on May 7 on its first-quarter trading. Do not expect any huge surprises: those cost savings will be confirmed and in the nature of these things almost certainly will be exceeded in due course. The market seems to have overcome its initial opposition to the Friends deal, but the shares look to have further to run.
My advice: Buy
Why: The Friends Life deal looks an increasingly favourable one, with good prospects for sharp rises in dividend payments
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Falkland Oil and Gas
FOG’s share of Zebedee well 40%
The decision by Falkland Oil and Gas, and its partners Noble Energy and Edison International, to suspend drilling at a second well in the south and east Falkland Basin should come as no surprise. The action of late has been in the north of the archipelago, with the promising discovery at the start of the month at the Zebedee exploration well.
Falkland has 40 per cent of this and it makes no sense to press ahead in the south. Instead, the partners will have time to appraise fully the prospects for the Humpback find near by. Falkland would have been stretched to afford the cost of the proposed drilling programme.
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All this, of course, should be seen in the context of the bombed-out oil price; likewise, the decision by Argos Resources, another exploration tiddler, to farm out its own 100 per cent interest in another north Falklands prospect to Noble and Edison.
Yesterday’s update from Falkland contains some promising numbers for Humpback. The company remains an interesting bet on that less proven southern field with a lower risk profile and greater security of finances. The shares were unchanged at 29p, still well back from the 45p they hit on the announcement of the Zebedee discovery.
The biggest player in the Falklands among London-quoted companies is Premier Oil, which has 36 per cent of Zebedee and plans to develop the huge Sea Lion field. I am not sure I would be rushing to invest in any of the Falklands players at present, though.
My advice: Avoid
Why: Risks from Falklands still look excessive
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Smurfit Kappa
€36 reported level of IP bid
If, as I suggested the other day in the context of the recruitment sector, cyclical stocks are coming back into fashion, it would make sense for International Paper to make its expected bid for Smurfit Kappa.
The company has its main quote in Dublin, but it has dithered for a while over moving to London, where it would be in the foothills of the FTSE 100. The logic behind the purchase can be found in the strong dollar and exposure to growing markets, where the sort of savings available to retailers from single-sourcing their packaging needs are as yet unappreciated. Smurfit, formerly overly encumbered with debt, recently concluded a purchase in central America.
Of its two quoted peers, DS Smith, whose shares rose 8p to 380p, sells on a rather higher multiple of about 16 times this year’s earnings. Mondi is jointly quoted in Johannesburg and London, which could prove difficult for any bidder.
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IP is said to be offering €36 a share. Smurfit’s shares barely budged, up 70 cents at €29.40, which suggests the market does not expect a deal. They have come up from just €15 last summer; I would be tempted to take some profits.
My advice: Take profits
Why: No guarantee that any bid will emerge
And finally . . .
A dividend yield of 10 per cent is not something to be ignored in this income-driven market, and this is the promise from a highly specialised fund about to be listed in London. Ranger Direct Lending Fund hopes to raise £135 million, although this could be increased by another £20 million, according to demand. The Texas-based company will buy loans made to small businesses and consumers by direct lending platforms, which have become more popular as the big banks have cut back on lending.
Follow me on Twitter for updates @MartinWaller10