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Income Investor: RSA, dividend cuts and when to sell

Dividend cuts from RSA and Morgan Sindell highlight the need for income investors to do their research and diversify their holdings.

Income Investor: RSA, dividend cuts and when to sell

Another day, another dividend cut, it seems. First for my portfolio it was Morgan Sindall (MGNS.L) and then it was RSA Insurance (RSA.L), with a crashing 14% share price fall on the day of the announcement.

Morgan Sindall is in the UK construction sector, specialising in infrastructure, affordable housing, 'fit out' (for offices and shops), urban regeneration and property investments. Their preliminary results disappointed and unveiled a dividend cut. RSA, the general insurer behind More Than, yesterday ‘rebased’ its dividend (ie, cut it by a third) when it announced its full-year results.

Putting aside the specifics of these two companies, there are some general themes that may be relevant to other income investors.

High yield = high risk

One half of my income-oriented portfolio targets good quality shares that have attractive dividend yields. Selecting the shares is not easy: because they are – by definition – ‘high yield’, Mr Market has already indicated that there is something about the company he just does not like. The high yield means the shares have fallen, indicating investors' doubts over whether the dividend is sustainable.

A good rule of thumb is to be wary of anything that is more than twice the average yield of the market (so currently anything more than 6-7%). You should see the high yield as a flashing amber light, warning you to do your homework. Your job is to find out what the potential problem is and to make your own assessment of how likely you think it is to go bad.

At the very least you should look at the latest company report and accounts and try to read between the lines. In particular you will need to look at cash flow, dividend coverage, trends in debt and profitability, etc. The dividend trend and stated policy will also be of particular interest, although this can sometimes be massaged. Todd Wenning’s Dividend Compass is a good example of the kind of detail you can go into.

Even being careful, you might get it wrong, as I have with these two. But that is the nature of the beast: high-yield dividend investing is arguably a form of contrarian value investing. And when a dividend share goes bad, there is a ‘double whammy’: the dividend is cut and the share price falls. It’s a bit like walking a tightrope without a safety net.

When to sell?

Many income investors will sell on a dividend cut. But another common factor of these two dividend-disappointers is that I will continue to hold them (for now). I am still above water on the price and the forward yield is likely to be around 5% for both. They are still good businesses; as long as the dividend yield remains acceptable I will only sell if the business model looks shaky.


These results highlight the need for diversification in any portfolio. In my case the fixed-income half of my investments is steady, although starting to come off its valuation highs. The big problem for dividend shares is the continuing depression in the UK and European economies. Any company that is looking primarily at these markets is likely to suffer over the coming months. The 'Great Rotation' is likely to rotate to somewhere else.

Which is why, for the last couple of months, I have been trying to diversify away from Europe, whilst – unfortunately – watching my pounds quickly lose value.

If you've enjoyed this article, why not visit DIY Income Investor's blog. The views in this article are the author's own, and do not constitute advice.

You can see previous articles by Income Investor on the 'Citywire Money guide to income investing'.

36 comments so far. Why not have your say?

an elder one

Feb 21, 2013 at 14:40

As a holder of RSA; useful to know!

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Robert Goddard

Feb 21, 2013 at 15:11

Thie RS dividend cut was signalled last ywar, so why all the fuss.

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Chris G

Feb 21, 2013 at 16:36

I don't think the RSA dividend cut was signalled last year. What they said was that the divi would be grown at a rather lower rate than hitherto. They didn't suggest a negative growth, and even at the interim stage, they implemented what they had forecast, i.e. a very small increase. This cut was a surprise.

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Feb 21, 2013 at 16:49

Assuming that the dividend cut is well thought out and puts finances into better shape and secures future dividends current yield of 4.5% still looks healthy. I would continue to hold.

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Peter Dawson

Feb 21, 2013 at 17:02

The article "when to sell" is a bit late. For me the time to sell RSA was last week. It will take years of dividends to offset my loss on share price. At least the current price still shows me a small capital profit. Looking at my notes I see that only one analyst has recommended a sale recently. All the others recommeded buying. Now they mostly recommend selling. So much for analysts.

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Hooper from Somerset

Feb 21, 2013 at 17:21

Peter Dawson is spot on. I was reading broker reccomendations on Citywire a few days ago when a broker was strongly in favour of a "buy" for RSA. These overpaid people make me laugh, they don't know their asses from their elbows and are led by events, not predicting them.

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Feb 21, 2013 at 17:52

I still find that a slush fund of insurance shares provides me with the best value long term insurance that money can buy!

Agree completely with you all regards financial wizards turning with the wind rather than tacking through it!

As for shares which offer rotational robustness, Warren Buffet's lead into Tesco, IMHO was prophetic!

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Don Lund

Feb 21, 2013 at 18:25

Forget " Time to sell 1 " I topped up at the 15% fall and will still get a good return on all my holdings.

I think the drop has been overdone.

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Feb 21, 2013 at 19:48

Comical to think that you would sell a 4.5% yielding share today,after they have cut dividend, they still yield 4.5%,what is your problem? I am happy with 4.5% as my building society gives me no more than 2%. Besides, I still have 12% profit on my buy price. If it dropped further it would yield 6% and I would buy more.

Good, rational manageent decision to strenghten the shares, in fact I am about to talk myself into buying more....

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Robert Goddard

Feb 21, 2013 at 20:01

I am also a continuing fan of RSA at 4.5%.

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Feb 21, 2013 at 20:12



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David Shelton 0

Feb 21, 2013 at 22:10

So, 4.5% yield is acceptable? Not on its own; one needs to have the prospect of an upturn in the price to yield a capital gain as well. With the general economy as it is, and the insurance world suffering with the rest what are the real prospects for sufficient share price increase to cover the dealing costs?#

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Peter Dawson

Feb 21, 2013 at 22:16

I misled you if I gave the impression I was a seller of RSA. I still have a good yield on my original investment.

My worry now is Aviva. Looking at my notes I see only 'hold' amongst the 'buys'. Commentators have opined Aviva "a recovery play" and "set to leap". All the ingredients for a collapse.

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Chris Hayes

Feb 21, 2013 at 23:27

"It will take years of dividends to offset my loss on share price. At least the current price still shows me a small capital profit.".

My initial reaction is that these are mutually exclusive - but no-one else has commented so now I'm wondering... .

Am I right or what am I misunderstanding?

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Hilary hames

Feb 21, 2013 at 23:29

article on Interactive Investor

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Feb 22, 2013 at 02:19

Bought RSA at 115p Sep 2011 and Sold for 120p Dec 2012 - approx. £75

profit but some decent dividends. Lost interest as the price seemed to be going nowhere - until after I sold when they moved up quite a bit before falling on the news of the dividend cut.

I also held some Aviva shares bought for 323p in Aug 2011 but sold these yesterday for 352p having become nervous about a similar dividend cut.

Again, taking dividends received into account, they beat the Building Society.

Bought Morgan Sindall at 525p in Dec 2012 as they were well down from their 52 week high and looked reasonably attractive. I am usually wary of high-yielders but did not expect this cut. Will continue to hold but may consider selling if they reach 550p - I think it will be some time before they return to 600p and will we ever see their 52 week high of 717p again?

I agree that brokers don't know any better than the rest of us most of the time - if they were that good they would have made their money and retired!

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Ian Holmes

Feb 22, 2013 at 05:24

Some interesting comments here and nice to get the various opinions.

Like Roger, I sold my RSA shares and then bought back in at 125, attracted by the dividend yield, kicking myself because the share price rose after I'd sold!

The new 5%-ish dividend based on the current price of between 117 and 118 is a good prospect and possibly a buying opportunity if you're feeling brave after the share pasting this week..

Interestingly, when the stock market tanked yesterday, RSA was the 3rd highest riser, albeit only a percentage point or so. I think the selling was overdone and that the price will rise to around 120/122 when sentimental emotion gives way to objective rationalism.

I think "re-basing" the dividend (and the CEO has already told the market that a similar re-base for the interim will occur) plus the company's commitment to grow the re-based dividend is a very sensible and mature business decision.

Oh, and Hooper from share my conviction on brokers. I would add that they spend the day sitting on their asses with their elbows on the desk, head in hands thinking about their next payday or holiday. You only need to look at broker analyses and see the ridiculously varying opinions and target prices. Why the market still reacts to their upgrade/downgrade/neutral statements beats me. Overpaid juvenile scribblers, the whole bally lot of them. Ignore their opinions except to be prepared for an irrational market reaction to any of their latest pontifications.

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Feb 22, 2013 at 07:28


I share your concept of brokers - I believe I may be forgiven for thinking they spend their days dreaming up alternative vocabularies for the standard "buy, hold, sell" which offer optimum clarity, even to those who don't speak English! Reading some, they give the impression their offices are based at a racecourse! Do we really want to do business with guys who jostle with bookies?

Another hobby-horse is their price adjustments following out of hours trading, overnight - makes a nonsense of the market pricing concept and is open to manipulation. Makes my blood boil to see a share open at the same value as at previous close, but being quoted as a "riser"!

Do they think they're being nice to us? Is it their way of making friends? (FFS!)

I guess it's part of contemporary city culture - invent something so as not to be seen playing a straight bat - it's just not fashionable!

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David B

Feb 24, 2013 at 16:23

I bought Amec on the back of a Seymour Pierce "buy" recommendation (broker - Lapwood) on this very site a few days ago. "Strong" set of results anticipated, strong this and strong that blah, blah, blah. The results came out, disappointed badly and the shares dropped 6%. How could he be so wrong? And why do Citywire give these people such prominence? Broker recommendations are pretty dodgy in my experience and need treating with great care. Some are good (Goldman, UBS and a few others) but many are rubbish. No prizes for guessing my current view on Seymour!

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Feb 24, 2013 at 22:29

RSA is a big loser for me, but I bought in more @ £1. Even @ 4.5% it is a decentish yield. Likely to hit that figure again, and likely I will only sell to take advantage of the loss, £5k.

Morgan Sindall is also a hold, still in profit for me. The figures for theses 2 are getting to the 08/9 levels, a sign, perhaps that we are getting back to that territory, despite the current level of the ftse, which, in the view of this individual, as climbed to far toooo fast. Interesting times.

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Alan Selwood

Feb 26, 2013 at 16:40

There are times when I think that the best buy recommendation is actually a broker's consensus rating of 'sell'. (You are then not buying in a bubble of euphoria about the company).

The best fund managers do their own assessment of a company, rather than relying on brokers who often/usually get their pay from the company they write the opinion on. This I deduce from the higher proportion of 'buy' ratings to 'sell'.

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David Shelton 0

Feb 26, 2013 at 19:05

I think most serious investors will probably read brokers' reports just to get a bit of background. However, there is nothing better than having your own set of criteria and doing the research yourself. I am taking a good look at RSA at £118.8 - I think that at level the dividend yield is in the right area, and there is room for upside on the share price. If I do buy tomorrow then I would probably look for taking profit around the £1.30 level. Modest - but I have been guilty more often of waiting too long in the hope of a bigger profit and seeing prices take a reverse after everyone else has taken their profit!

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Peter Dawson

Feb 26, 2013 at 23:17

David. For me the question was whether RSA is the best value at this time and with this price and yield. My answer was no there is better value elsewhere. I sold RSA at a small profit and reinvested the proceeds..

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Ian Holmes

Feb 27, 2013 at 03:47

David (Shelton): I agree 100% with you.(I think also that the sentiment against RSA has been a little exaggerated by the executive pay issue). I bought a long position CFD when the price tanked, entering again at 118.1 and showing a slight profit today (Tuesday close: sp 119.1) in a heavily falling market when every other position I hold lost some value. Monday's rising market produced 120.7 closing SP.. I'm expecting my RSA CFD to reach 123/124 to slake my original losses. Then I will sell the CFD on trailing stop and leave my RSA position as it is as a long term dividend income share. My "guesstimate" is that dividend on today's price is likely to be in the 4.5 to 5% region for the full year (but I see. is more optimistic, suggesting a 6.22% yield on current price)

For anyone who still pays attention to analysts' forecasts, 23 out of 31 are currently saying buy, hold or outperform! Only 2 advocate a definite sell:

The med to high analyst forecast for the sp (on the same page) is 124.5 to 153-and so I don't think an SP of 123 is too ambitious a target for me or too far ahead for that matter.

Peter, I'm sure there is better value out there and I'd be interested to know where you re-invested. Do tell! Don't be shy.............

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Peter Dawson

Feb 28, 2013 at 17:29

Ian/Dave. I have taken a bit of a gamble with some of the proceeds and invested in Albemarle and Bond. A company with a strong basic business model and experienced management. It got carried away with gold but is now making a strategic withdrawal to the basic model but in more locations. On the recently reduced forecasts it has a prospective PE of only 7.87, a PEG of 0.64 and a yield of 6.05%% with 2.2x cover (SEE REFS) . I believe the upside is greater than offered by RSA.

A recovery stock in the manner of Hargreaves Services - I hope.

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David Shelton 0

Feb 28, 2013 at 19:03

Hi Peter, I have had a look at the A&B Holdings a couple of time since they came off their peak. I hadn't looked for a while, but your prompt is timely - looks like they have reached a realistic price and the yield at 230 looks attractive. Slightly smaller market cap than I normally play, but the fundamentals look good. I may take some profit on my Brammer and look for these to give me a new run.

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Feb 28, 2013 at 19:42

Please keep discussions to RSA and move your potentially dangerous tips to forums they belong.

A&B and RSA simply can not appear at the same forum. I would never invest in A&B, you may, and I wish you good luck as you can afford it.

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Peter Dawson

Feb 28, 2013 at 22:35

Sorry did not realise the site was reserved for RSA. Concerning A & B I was invited/challenged to name my investment and certainly was not offering anybody a "tip".

I doubt there is much more to say of any great interest on RSA for the future.

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Ian Holmes

Mar 01, 2013 at 03:08

Thanks Peter. Your reply was quite in order and satisfied my curiosity.

AA: I think you are being just a little unfair. Forums are for discussion and dare I say it enlightenment as to others' thoughts not to mention the odd challenge here and there. Someone's rationale for buying/selling shares is always welcome. DYOR always of course and I certainly didn't see Peter's reply as a "tip". Reasoning behind your own reply would have been helpful (and not seen as a tip of course!). As it is, your note neither challenged nor enlightened, sadly.

As requested though, and keeping discussion to RSA - on a more positive note, it does seem that sentiment is becoming more positive towards RSA with the SP edging in the right direction this week. Hopefully 123/124 will be reached in the not too distant future, At present prices and working on the CEO's comments, dividends look to be around 5% for the full year which ain't bad really and I think this will help support a modest SP rise.

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Mar 01, 2013 at 10:14

OK, I regard pawnbrokers as opportunist crooks, you invest if you want to, I would not.

However, I still can not see how it gets a mention in RSA forum. I made more profit from my HSBC or BSkyB shares, how does that fit with the dividend cut at RSA and whether to sell, hold or buy. Aberdeen New Thai investment trust share price doubled in value over the past 12 months.... What does that mean in this forum if it is not a tip? I would love to tip shares that do well but if they did well in the past 12 months does not mean they will continue to do well. They may well be overpriced.... Never mind, I am sure you had good intentions and perhaps I was a bit harsh.

For those who wonder what Albemarle & Bond Holdings do, below is an extract from their web site.


Albemarle & Bond Holdings plc comprises a portfolio of the UK’s leading pawnbroking, financial services and jewellery brands. Founded in Bristol in 1983 with a single shop, the company is now based in Reading and was admitted to the Alternative Investment Market (AIM) in 1995 (TICKER: ‘ABM’). EZCorp, the second largest pawnbroker in the US and the company’s largest shareholder has been a supportive long term investor since 1998. In 2007 the Group grew with the purchase of Herbert Brown who were established in Leeds in 1840.

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Ian Holmes

Mar 01, 2013 at 11:20

AA. I have to agree that A&B would not be my choice of investment, and I think Peter may well get a decent profit from the swap, but its not what I would do. We need to look at what type of investment we are seeking. I invested in RSA for dividend. The sp drop and the dividend cut present an opportunity as well as a downside. The re-based divi (somewhere in the region of 5% on 118p sp) with a promise from the CEO to increase y-o-y - all at a bargain basement share price suggests that if you have confidence in the company and its management buy more, or at least buy a "long" CFD to help cover the loss in SP. If you feel the shares will go down, buy a "short" CFD after selling your existing holding.. I took the long CFD route. The RSA situation ain't a disaster!

Momentum shares are another issue altogether. Buy when the momentum sets in and sell when you have a nice profit - don't hold on too long, set a stop loss. Look for the "golden cross", which A&B seems to be approaching in March (50 day rising crossing the 200 day average). Not for widows and orphans - but potential for good profit. Get in early and get out early while in profit. RSA is a different beast altogether. Its a long-term investment for income, not for growth and certainly not a momentum share.

I love your comment about pawnbrokers being "opportunist crooks"! So maybe play them at their own game (not suggesting in ANY way that you're a crook! LOL) and profit from A&B's temporary rally! Not for me, though. ALWAYS DYOR.

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Peter Dawson

Mar 01, 2013 at 11:25

This was the first and will be the last time I will pass any comment. If this is typical of the response its all a bit too precious for me.

I would be a little careful before I accusse a company in writting as being "opportunistic crooks"

Dr Peter Dawson MA FCA

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Ian Holmes

Mar 01, 2013 at 11:38

Peter. Please don't be disheartened or put off from adding your comment. The whole point of a blog is to exchange ideas. Your comments have been much appreciated (by me, anyway). Bear in mind that A&B were not accused of being "opportunist crooks" - just the industry in general. Maybe they are the exception that proves the rule. Keep on contributing Peter. It all adds to the fun of the chase. I am really interested to know how you fare on your share swap. I actually think you will do very well. Don't hold too long though. Set a stop-loss. End-March, I believe is the day of reckoning. Good luck! I will watch the A&B share price with added interest now!

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Mar 01, 2013 at 12:09

Thanks Ian,

Here is further extract from A&B web site FAQ. Money lending to poor desparate people who need as little as £150 at 8% per month, approximately 172% compounded APR.


What is the cost of an average loan?

Rates vary according to factors such as the size of the loan. On average a pawnbroking loan with our Company costs circa 8% per month in interest. Most are repaid within three months and so the cost of borrowing £150 over three months is £36. This compares very favourably with other types of loans and extremely well against the cost of going overdrawn by even a small amount.

What is the average loan size?

The average loan size is £150.

What is a pledge book?

A pledge book or loan book is the total amount the Company has lent on a specified date. It is a measure of the Company’s success that the pledge book has grown substantially over the last few years, reflecting that more customers have taken out loans with the Company.

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David Shelton 0

Mar 02, 2013 at 15:20

Interesting to see the varied reasons why individuals invest. I make no bones about it: I am investing for capital appreciation. If, while the share price is on the up it also pays a decent dividend yield then that is good news. One has to bear in mind though that most dividend yields are currently doing little more than keeping up with inflation, so capital growth is essential. Rightly or wrongly, I do not base investment decisions on the morality of the company. If the company is in business and trading within the law who am I to argue? I do that through the ballot box. not my investment portfolio.

If A&B are worth a punt for a while in the expectation of me making a capital gain then I' would consider them. Similarly, while RSA is still a decent yield play, if I thought there was room for capital gain I would invest.

At the end of the day is RSA a more ethically or morally correct business?

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Mar 02, 2013 at 21:06

All very well - minnows are all too often run by significant shareholders/managers for their own benefit and pay scant regard to other shareholders. Often they're in and out of private equity then quoted equity as the wish suits.

Usually the nature of the business is a pertinent indicator as to the ethics of the management!

Study of past management behaviour pays dividends (as well as CG!)

No names, no pack drill, of course!

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