We have had final results from the Lloyds of London Corporate capital vehicle Amlin (AML) today. This is a well managed group that says about itself that:
"The strength of our franchise, underwriting expertise and ability to adapt are powerful advantages as the market evolves. Amlin is well positioned to take advantage of the opportunities created by the pace of change in our markets, and has an excellent track record of cross-cycle underwriting discipline. We continue to believe that we can deliver attractive returns on equity."
Talking of ROE they delivered around 14% this year down from nearer 20% last year, reflecting the more competitive nature of the insurance market this year which they flag up in the statement. They expect this to continue in the year ahead and as a result they are cutting back in some areas where there is excess capital chasing premiums and reducing returns.
Consequently they have announced today a special dividend of 15 pence, as they do periodically in times like this, to keep their balance sheet efficient and to support their returns. This gives a yield of 2.9% based on the 513p share price this morning and is in addition to the full year dividend of 27p which was up by 3% for the year and which itself gives a yield of 5.3%.
Summary & Conclusion
They shares look fairly valued on around 1.6 to 1.7x tangible book value given their ROE and similar metrics that apply to Catlin (CGL) which is about to be taken over. The main attraction is the 5%+ yield from dividend which had grown by nearly 9% per annum over the last 5 years. However, this years dividend of 27p was some way short of the estimates that were in the market, although perhaps they included some expectation of a special? Taking this into account the compound growth rate over the last 6 years comes down to 8%, which is still quite good given the current yield. I guess given the outlook the rate may be a little slower in the current year but it should still be sufficient for the shares to offer a double digit potential return, which seems fair enough. So they would seem like a strong hold for income as part of a diversified income portfolio.
Meanwhile in brief GlaxoSmithKline (GSK) have confirmed that its three-part transaction with Novartis has completed today. As a result, following today's completion, GSK plans to use the transaction proceeds to fund the full amount of the previously announced capital return of £4 billion to shareholders. Subject to shareholder approval, the capital return is expected to be implemented through a B share scheme, which will provide capital treatment for all UK tax-resident shareholders. Further details on the capital return will be sent to shareholders in due course.
In light of the timing of closing the transaction, the Company intends to report its first quarter results for 2015 and hold an Investor Meeting on 6 May 2015, at which it will provide 2015 earnings guidance and profile the medium and long-term shape and opportunities for the enlarged Group.
So if you are a holder it will probably be worth putting that date in your diary. While the £4bn is around 5% of the market cap and could effectively double this years expected unchanged dividend from GSK it is just a return of capital so the value of your remaining holding will go down by the same amount.
Longer term readers will also know that I have concerns that this business restructuring and the New Chairman Sir Philip Hampton (who has been involved with dividend cuts and omissions throughout most of his career) increases the risk that GSK will use this as an opportunity to "re-base" the dividend (as nobody cuts these days) going forward after this year.