Shaping up well for the future The Old Mutual split into four stand-alone businesses has been welcomed. Further, the share currently trades at a price-to-earnings ratio of 14 times and offers a dividend yield of 4.2%, presenting an attractive buy.
oldMutual is an international investment, savings, insurance and banking group with more than 18.9m customers in Africa, the Americas, Asia and Europe. Founded in 1845 by Scotsman John Fairbairn in Cape Town, Old Mutual was initially known as Mutual Life Assurance Company. In 1999, it moved its primary listing to London, while retaining a secondary listing on the JSE.
The group has performed well over the past years, reaching an all-time high at 4 715c/share in 2015, up from its 2008 low of 460c/share. The stock has returned 6.6% to investors since the start of the year.
Investors have welcomed Old Mutual’s plan to split into four stand-alone businesses: Old Mutual Emerging Markets, which focuses on savings, investments and insurance; Old Mutual Wealth, a wealth manager based in the UK; its banking arm, Nedbank; and Old Mutual Asset Management (OMAM), based in the US.
The aim of the split, which is expected to be completed by the end of 2018, is to give the separate businesses easier access to capital markets for their funding needs, simplify their regulatory obligations, make it easier for the market to value the separate operations appropriately, and to save costs.
Old Mutual generates the bulk of its profit in South Africa, yet reports its earnings in pounds. The near-halving of the rand against the pound over the past five years has weighed on its financial performance, as well as the strength of its balance sheet. By separating its US and UK businesses into separate divisions, Old Mutual’s financials could therefore look more enticing. Despite the proposed restructuring, Old Mutual has continued to focus on growing the separate businesses.
Its Old Mutual Wealth Private Client Advisors business announced the acquisition of the UK-based financial planning firm DQS Financial Management earlier this month, adding 650 clients and £200m to assets under advice. It also announced the purchase of 60% of US-based investment firm Landmark Partners by its OMAM unit, for about $240m in cash. An additional payment may be due based on the growth of the business by 2018. As part of the transaction, OMAM will settle liabilities to the Old Mutual Group sooner than expected, thereby hastening its split from the group. The Landmark deal is expected to be concluded by the end of September.
In the six months to end December 2015, Old Mutual reported adjusted operating profit before tax of £1.8bn, an increase of 5% in reported currency (it was up 11% in constant currency), while funds under management increased 8% to £304bn. Nedbank was the largest contributor to the group’s earnings, contributing 41% to adjusted operating profit. This was followed by Old Mutual Emerging Markets, which contributed nearly 34%.
Old Mutual is currently trading on a price-to-earnings (P/E) ratio of 14 times and offers a dividend yield of 4.2%, according to INET BFA data. This makes the share an attractive buy.
Possible scenario: Old Mutual has been range-bound in the form of a symmetrical triangle for the past seven months. Recently bouncing on the lower slope, gains to the upper slope seem possible. But in order to escape current consolidation, Old Mutual would have to trade above 4 375c/share. The upside target of such a breakout would be at 5 630c/share. Alternative scenario: A negative breakout, confirmed below 3 600c/share, could trigger a sell-off to 2 345c/share, if the red trendline should also give in.