Saga sags as results disappoint despite 18% dividend hike

Over-50's insurer and tour operator Saga proposed an 18% dividend hike after delivering a solid year of profits growth.

Underlying profit before tax, excluding derivative gains and the impact from the government's changes to the Ogden discount rate for personal injury claims grew 5.6% over the year to £187.4m for the year to 31 January.

This was virtually in line with consensus forecasts of £188m, and would have been higher but for the £5m drag from maintenance downtime at its Sapphire cruise ship.

Growth reflected a very strong performance in the motor insurance business, more than offsetting declines elsewhere in insurance, and positive travel performance.

Basic earnings per share from continuing operations of 14.1p were up 6.0% from the previous year.

A year of strong cash flows saw the board propose to increase the final dividend to 5.8p, leading to growth in the full year dividend of 18.1% to 8.5p per share, and cutting net debt from £547.7m to £464.8m.

Chief executive Lance Batchelor is shifting the company towards a new lower-capital model where Saga will leverage a deep knowledge of its loyal customers to enable it to act as a broker of various third-party services.

Towards this aim, it has identified around half a million 'higher-affinity customers', HACs, which buy premium versions of what Saga sells, have higher retention levels, and have a higher propensity to buy multiple products across the group, holding an average of 2.1 core products each -- with a target improve this average by 20% over five years.

Using the knowledge about this group Batchelor believes he can can significantly refine the current model to increase efficiency by reducing marketing costs, while examining similar customer group's who do not share all the same characteristics to approach and market to them in a way that optimises the likelihood of them developing an affinity with Saga.

A new membership scheme is to be launched int he second half of the year.

"We believe that the combination of our increasing customer insight, data capability and membership will be extremely powerful, helping us to focus our efforts on rewarding, retaining and growing our target customer base and deepening our relationship with them," Batchelor said.

"Our goal is therefore to grow the number of products held by HACs by 20% over the next five years."

Shares in Saga, which last week hit their highest level since October, were down 2% to 205.7p by 1025 BST on Wednesday.

House broker Numis was pleased, noting that Saga has started the current financial year well and that management are confident of ongoing consistent profit growth.

"We expect consensus forecast for Jan-18 to reduce slightly as some of the high estimates are updated but underlying prospects for the year appear well supported by recent initiatives and ongoing momentum of the product portfolio as a whole."

Analyst Nicholas Hyett at Hargreaves Lansdown said "The group’s strategy revolves around using the strength of its holiday brand to sell a variety of more mundane products to its over 50s client base – it’s a strategy that seems to be working well.

"Historically Saga underwrote its own insurance contracts, taking advantage of the lower risk profile of more mature customers. However, it’s increasingly funneling customers through to a panel of independent underwriters who compete to offer the best price, keeping only the lowest risk customers for itself.

"It looks like that shift is paying off, with the significant improvement in motor broking profits more than offsetting the decline in underwriting this year.”