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Resolution Limited (RSL): Should You Buy It Today?

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Resolution Limited (RSL)LONDON — I believe shares in life insurer Resolution Limited (LON:RSL) are on the cusp of a meaty upward rerating.

In my opinion there is a huge variance between the current share price and the firm’s ultra-generous dividend policy, as the yield runs well ahead of the 5.4% sector average forward reading.

A delectable dividend selection
Resolution Limited (LON:RSL) is a favorite among income investors owing to its record of awarding shareholders with dividends well ahead of the forward FTSE 100 average.

The company increased its full-year payout to around 21.1 pence per share in 2012, a 6% annual rise, and analysts expect the dividend to keep edging north in the medium term — a dividend of 21.2 pence per share and 21.4 pence per share are expected this year and next.

Although these increases are clearly at a much lower rate than those previously supplied, dividends for 2013 and 2014 still carry massive yields of 8.4% and 8.5% respectively. These incomes compare starkly with a prospective yield of 3.3% for the wider FTSE 100 index.

Investors should be aware that these payments boast scant dividend cover, however, with coverage of just 1.1 times and 1.3 times forward earnings for this year and next. This coverage is well below the largely held security touchstone of 2 times.

Still, the company has still hiked dividends even in times of previous earnings pressure, and lifted last year’s payout despite a 61% fall in earnings per share.

As well, the company has an exceptionally strong balance sheet — its sustainable free cash surplus rose to 300 million pounds last year — and is in a strong position to hike free cash flow if required to maintain dividends though cost-saving initiatives and lifting assets under management. Last year’s dividend was 117% covered by cash passed on to Resolution Limited (LON:RSL)’s holding companies.

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