BUY: Old Mutual--A great growth and income company

Price: 187.95p
Shares: 318
Predicted annual dividend income: £27.89

There are an awful lot of insurers in the FTSE 100. however, one of the lesser known ones is the African-focused Old Mutual. Although much of its income is from Africa it also includes large income from Asia and Europe.

Old Mutual has been of interest to me for some time. It seemed to combine the qualities of a growth and an income stock beautifully. Consequently, with share prices declining across the board I felt it time to finally push some funds in their direction. But why?

Financial Diversity

Old Mutual has quite a diverse range of activities under its name: insurance, investments and retail banking. A lot of this is derived from the fast growing (though somewhat volatile) African market which is, indeed, its home.

However, it has been doing a great deal of acquisitions recently to bolster its offering to customers (especially in more mature markets). Consequently, I am quite encouraged both by the geographical diversity it is trying to bring about with these acquisitions as well as the exposure to the growing African market going forward.

But what about the value?

Excellent P/E Ratio

With regards to value, Old Mutual (like a number of insurance stocks) looks pretty good value. For this year coming:

	EPS	P/E Ratio
Consensus	16.65	11.29
High	21.48	8.75
Low	8.33	22.56
Difference (%)	128.89

As you can see, one concern is that the difference between the highest and lowest prediction is pretty wide (nearly 130%). This is largely due to the volatility of the African market in which Old Mutual makes a vast proportion of its income. However, it seems the analysts believe that a higher EPS is likely.

Things do improve somewhat the year after:

	EPS	P/E Ratio
Consensus	19.63	9.57
High	23.42	8.03
Low	12.73	14.76
Difference (%)	73.51

Again, the difference is comparatively wide. However, is is much reduced and the highest P/E prediction is under 15. As such, I consider this a potentially lucrative stock faced with quite significant short-term volatility.

Dividend Yield

It is here where Old Mutual really catches my eye. Analysts predict a yield of 8.77p and 9.88p for this year and next. These represent yields of 4.67% and 5.26%. These are stonking yields and represent dividend growth of 8% and 12% respectively.

What is more, assuming the consensus EPS for both years the cover should be 1.9 times EPS and 2 times EPS. As such, they seem very ably covered.

Of course, the dividend was cut in 2009. This contrasts to some of the other FTSE 100 insurers who maintained their dividends throughout the crisis. However, it is not as bad as that looks. Despite this modest drop the annual average growth since 2003 has been about 5%. Not bad at all.

Other Metrics

All of this looks pretty solid if not spectacular when we consider the potentially volatile bottom line. However, on other metrics Old Mutual looks stonkingly good value. Its debt to equity ratio is about 0.36 which is very good indeed. What is more, debt has decreased since 2009 and cash reserves have grown. As such, the company seems in rude health.

On my calculations the company is also trading at a modest premium to its book value per share of about 148p.

Old Mutual and my Goals

So how does Old Mutual fit into my goals? Oddly enough, on the face of it not great. With a Beta volatility value of 1.31 it does negatively affect my target of getting a portfolio Beta of 0.85 or more. 

However, it is with regards the dividend that it adds greatly to the achievement targets. First, with a yield over 4.6% and over 5% next year it contributes nicely to my portfolio target of 4% or more. What is more, it should provide me with about £27.89 in dividend income which should help me nicely towards my £800 dividend income target for the year.

Overall, I am happy about this purchase. I am happy to accept a bit of volatility with stock as I believe, in the long term, will provide for me well. With its careful acquisition policy, strong presence in the emerging markets in Africa and strong financial standing currently I see it with a bright future going forward.