Cash generation spooks investors

THE UK saver is back saving. That was the view of analysts at Investec yesterday, after Standard Life reported a seven per cent rise in operating profits to £425m, according to IFRS standards. That was flattered by an unexpected £59m pension gain, but Investec saw significant positives, including big regulatory changes in the UK which are already benefiting the life assurance and pensions group.

Still, the shares reacted negatively, losing some seven per cent and wiping around £500m off the firm’s market value. David Nish, the chief executive, pointed out the shares have had a good run in recent days, jumping from 230p to just under 245p. But the firm met most market expectations: why the sell-off?

The answer is simple: cash. Cash generation – a key measure of Standard Life’s ability to pay future dividends – took a hit due to reserve releases; higher investment; and the lack of repetition of 2009’s back book management results. Operating capital and cash generation from continuing operations was 23 per cent lower at £287m. That undermines the group’s promise to deliver a “progressive dividend” (this year’s 13p per share was only just covered). Investors like the firm for its meaty yield of over five per cent. No wonder they voted with their feet yesterday.