How Much Upside Is There at RSA Insurance Group plc (RSA)?

The company disappointed the market earlier this year when it announced a dividend cut. This has led to the shares today trading down 8% on where they were at the beginning of the year.However, in the last month, RSA Insurance Group plc (LON:RSA) has outperformed the FTSE 100. By my calculations, this couldpresage further rises.

Valuation
Prior to the recent dividend cut, RSA Insurance Group plc (LON:RSA) shares were frequently one of the highest yielding in the FTSE 100.

Go back three years, and the shares were trading at around 118 pence. In the year that had just passed, RSA has made 13.9 pence of EPS (earnings per share). That put the shares on a historic P/E of just 8.5 times earnings and a historic yield of 7%. However, for the full year 2010, earnings at RSA Insurance Group plc (LON:RSA) fell 27%. That low P/E back then now appears totally justified.

Today, RSA’s valuation has picked up. The shares are available on an historic P/E of 10.4 times earnings. Although that is more expensive than the shares were three years ago, the outlook is much brighter. RSA Insurance Group plc (LON:RSA) is forecast to grow earnings by 10.5% this year — putting the shares on a 2013 P/E of just 9.4.

Better still, more earnings growth is expected in 2014, bringing the P/E down to just 9.0 times forecast earnings. The recent cut to the dividend and the strong earnings outlook raise the likelihood of dividend increases in the future.

By my reckoning, RSA Insurance Group plc (LON:RSA) shares will yield 5.3% this year. That’s an income worth taking, especially as it now looks safer than it has for years.

Verdict
Regardless of the strong market conditions, I think that RSA Insurance Group plc (LON:RSA) would be more fairly valued if it were 10% higher today. That would put the shares on a 2013 P/E of just 10.3. Such a rise would bring the dividend yield down to 4.8%. That would still be attractive versus other blue-chips.

The article How Much Upside Is There at RSA Insurance? originally appeared on Fool.com.