Should You Buy Mega Yielders BHP Billiton plc & Direct Line Insurance Group PLC?

Royston Wild considers whether massive yields make BHP Billiton plc (LON: BLT) and Direct Line Insurance Group PLC (LON: DLG) solid stock picks.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Today I’m looking at the investment prospects of two FTSE 100 stocks carrying delicious dividend yields.

A storming payout pick

Insurance giant Direct Line (LSE: DLG) has seen market appetite for its shares sink since the start of the year. Added to wider fears concerning the state of the global economy, expectations of colossal bills for the flooding still being experienced in the UK have driven the stock’s value 9% lower since the close of 2015.

Direct Line advised this week that it expects total claims to range between £110m and £140m, although it warned that the final bill “will not be known with certainty for some while.”

Although costs across its Home and Commercial operations are therefore expected to be higher than in an average year, Direct Line’s steady capital build under Solvency II directives should prevent recent weather activity playing significant havoc with near-term dividends.

Analysts in the Square Mile expect Direct Line to fork out a 20.4p per share dividend in 2016, a figure that yields an impressive 5%. By comparison the wider FTSE 100 average stands at around 3.5%. And thanks to the success of Direct Line’s long-running restructuring programme, I believe the insurer should continue to deliver market-mashing yields well into the future.

Time to stop digging

I’m not so optimistic concerning the dividend outlook over at BHP Billiton (LSE: BLT) however, as the relentless downtrend in commodity prices shows no signs of slowing.

Iron ore, a segment from which BHP Billiton derives 60% of underlying earnings, is seeing prices striding back towards the multi-year lows of $38.30 per tonne punched back in December.

And broker ANZ believes much worse could be in store thanks to weak Chinese demand and an increase in trade barriers. Indeed, the broker advised that “we expect prices to remain weak throughout the first quarter, ranging between $35 and $40 per tonne.” But ANZ added that “the probability of prices breaking below this range in the short term is rising daily.”

And BHP Billiton also faces fresh stress from other critical commodity markets. Copper slipped to its cheapest since mid-2009 recently around $4,350 per tonne, while the relentless stream of poor supply/demand data from the oil market threatens to send Brent further below 11-year nadirs of around $30 per barrel also struck this week.

Against this backdrop, it’s not surprising that the City expects earnings at the mining giant to tank for a second successive year in the period to June 2016, this time by a colossal 59%. Despite the positive steps being made by BHP Billiton’s long-running cost-shedding programme, such steps provide little relief as commodity values continue to fall.

The number crunchers expect BHP Billiton to therefore reduce the dividend to 124 US cents per share from 111 cents in 2015. Such a payment creates a stunning 9.8% yield, but with this projection almost double that of predicted earnings for the period, and BHP Billiton languishing under a multi-billion dollar debt pile, I reckon current dividend forecasts could miss wildly.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

2 recession-resistant UK stocks I’d buy and hold for a decade!

Our writer details two UK stocks she believes could still continue to perform well in a recession and not feel…

Read more »

Back view of blue NIO EP9 electric vehicle
Investing Articles

Down 31% this year! Is now the moment to buy NIO stock?

NIO stock has moved sharply downwards in the past couple of months. Christopher Ruane likes the business potential -- but…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 dividend stocks I reckon could grow payouts for years to come!

This Fool is looking for dividend stocks and explains why these two picks could be primed to grow their payouts…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Should I buy, sell, or hold my Rolls-Royce shares at £3.50?

This Fool considers what he should do with his Rolls-Royce shares following the FTSE 100 company's excellent full-year results last…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

With a spare £280, here’s how I’d start buying shares this March

Our writer reflects on what he has learnt on the stock market to explain how he would start buying shares…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Are these expensive FTSE 100 stocks actually brilliant bargains?

Paul Summers takes a closer look at two FTSE 100 stocks that could recover strongly in time, despite already carrying…

Read more »

Investing Articles

What might the recent Aviva share price performance tell me as an investor?

Christopher Ruane looks at how the Aviva share price has performed over the past 12 months and considers whether he…

Read more »

Investing Articles

Down by a quarter, is the BT share price a steal?

The BT share price has more than halved in the past five years. What is holding it down -- and…

Read more »