Standard Life improves profit and dividend

After trading sideways for the last month, a better-than-expected set of full-year results has put some colour in Standard Life's share price, nudging it back toward an all-time high. The insurer has offset a hit to profits from changes to UK annuities announced last year and, with few capital outgoings, is forecast to grow the dividend by 12% between now and 2016.

Fee-based revenue jumped by 14% in 2014 to £1.4 billion and underlying operating profit rose by more than a fifth to £561 million. Earnings from Standard Life's investment business were up by a third to £257 million, and the acquisition of Ignis Asset Management helped grow assets under administration by 38% to £297 billion.

Third party net inflows did fall sharply, however, down to £1.7 billion, largely due to £2.3 billion of well-flagged low revenue margin outflows from two mandates and £2.6 billion of outflows from the Ignis Absolute Return Government Bond Fund. Excluding Ignis, outflows were £0.6 billion.

And changes to the pension landscape impacted performance. Annuity sales fell sharply due to changes in the March 2014, and annuity new business is expected to fall by £10-£15 million this year, with asset liability management earnings down by as much as £40 million. But auto-enrolment is proving lucrative for Standard, which added 340,000 new customers to its books last year.

A final dividend of 11.43p takes the total payout for 2014 to 17.03p per share, up 8% on the year. "The dividends are 1.25x covered from the cash generation in 2014 which we see as strong cover given that the earnings are stable due to fee business model," explains JP Morgan.

Although the broker describes the update as "difficult" to navigate through, its analysts believe there is evidence of strong growth momentum. There are three pillars that underpin JP Morgan's investment case; £800 million excess capital that could be used for M&A, Standard's position to benefit from pensions reform, and its strategy for securing distribution.

"We reiterate our 'overweight' [recommendation], as we see it as high yield, high growth and low capital intensive business trading at 13x 2016e which ignores the £1 billion proforma excess capital at hold co (JPMe)."

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