Shares in Lancashire (LSE: LRE) dropped by more than 5% in early trading this morning after the company published its first quarter results, which showed yet another deterioration in trading as a tough underwriting market has continued to hurt the company.
Lancashire’s Pre-tax profit in the three months ended 31 March dropped to $26.5m from $51.5m reported in the year-ago period. Gross premiums written fell to $230.8m from $244.3m.
However, falling profits and the value of gross premiums written isn’t that concerning for a business like Lancashire. Indeed, insurance premiums are under pressure across the whole industry as capital flows into the market, a consequence of central banks’ easy money policies. As a result of this trend, Lancashire faces two choices. The company can either chase more business and accept lower premiums to keep sales growing, or write less business and concentrate on the deals that have the best risk-reward ratios.
Lancashire has chosen options number two.
Due to this strategy, the company has plenty of excess capital, which it’s returning to investors. In the results release Lancashire’s management reported “absent a market-changing event, there is no reason to believe pricing will improve in the near term, and it is, therefore, more likely that we’ll return capital than retain it later in the year.” City analysts have pencilled-in a dividend yield of 9.4% for this year. The company trades at a forward P/E of 11.
After several poor trading updates this year, shares in Next (LSE: NXT) are currently trading near a 52-week low. But the company’s recent poor trading performance is a boon for income investors.
Next is well known for its cash returns to investors. Management usually redistributes any excess cash from the business to shareholders, and this has led to some impressive returns over the years.
Over the past six years, Next’s dividend payout has risen at a rate of around 18% per annum and this year City analysts believe the company’s shares will support a regular dividend yield of 3.8% excluding any special payouts. Last year the company’s shares offered a yield of 7.8%. The company has also been buying back stock during the first few months of 2016 after the barrage of negative trading updates.
ITV (LSE: ITV) has paid an annual special dividend to investors since 2011. ITV’s regular and special payout has historically been 100% of the regular dividend. At present, ITV supports a starting yield of 3.3%. Assuming the payout totals 100% of expected earnings per share this year, the company’s total dividend yield could hit 7.7% after adding in the special payments.
Between the beginning of 2011 and end of 2015, the company has paid out 42.7p per share to investors. In other words, if you bought ITV’s shares when they were trading at 72p at the beginning of 2011, you’d now be sitting on a 60% return from income alone. Add in capital gains and your return would be 270%, excluding reinvested dividends. The company trades at a forward P/E of 12.7.
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Rupert Hargreaves owns shares of Lancashire Holdings. 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.