Friday, March 6, 2009

A tale of two life assurers

Over the past week a number of companies in the financial sector have announced their results. Two companies that have drawn my attention are Old Mutual and Sanlam. If you compare the performance history of these two companies, it makes quite a constrast in their investment case.

Sanlam is the second largest life assurer listed on the JSE. It was demutualised in 1998, and listed on the JSE at the price of R6 per share. On the other hand, Old Mutual is the largest life assurer listed on the JSE. It demutualised and listed on the LSE, JSE, ZSE, MSE and NSE. It listed on the JSE at the price of R14.10.

The dividend history of the two companies is as follows:

Year Sanlam Old Mutual
1999 25 20.77
2000 30 49.5
2001 35 72.3
2002 37 66.05
2003 40 56.01
2004 50 61.82
2005 65 61.34
2006 77 88.83
2007 93 102.07
2008 98 42.8

The closing share price as at 31 December 2008 is R17 for Sanlam and R7.60 for Old Mutual.

Assuming simplistically that the dividends are paid at the end of the year, the annualised rate of return produced by Sanlam and Old Mutual since listing are 15.61% and -0.25% respectively.

The return produced by an investment in Sanlam shares is respectable, while the return produced by an investment in Old Mutual shares is negative, both in nominal and in real terms.

The strategy followed by Sanlam, especially over the last few years, has been successful, and stands the company in good stead going forward. The strategy followed by Old Mutual has mixed results.

As an investor, I do not see the investment case for Old Mutual over the long term.

The above also shows how investors should not blindly invest in (large) companies due to their market capitalisation. Over the long term an indifferent investment approach can result in indifferent or pedestrian performance.

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