One Footsie dividend stock I’d buy along with BHP Billiton plc today

Roland Head looks at the latest figures from FTSE 100 (INDEXFTSE:UKX) mining giant BHP Billiton plc (LON:BLT).

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One of the big investing stories over the last two years has been the rapid recovery of the mining industry. FTSE 100 firms such as BHP Billiton (LSE: BLT) rose by more than 100% in 2016 and delivered further gains in 2017.

So what happens next? Today’s interim results from Anglo-Australian miner BHP make it clear that this business is performing well and generating a lot of cash.

Underlying net profit rose by 25% to $4,053m for the six months to 31 December, while the interim dividend has been increased by 38% to 55 cents per share, or around 39p.

Despite this, shares in this £86bn group have fallen by 3.5% so far today. Why is this?

A one-off boost?

The strong profit growth seen over the last six months was almost all driven by a single commodity — copper.

BHP’s average copper sale price during the half year was $3.20/lb, 33% higher than the $2.41/lb received during the same period last year. In addition to this, the group produced 17% more copper than it did last year.

As a result of these changes, copper sales rose by 51% to $6,381m during the first half. Underlying operating profit from the industrial metal increased by 83%, from $1,744m to $3,195m.

In contrast, profits from the company’s three other core commodities — oil and gas, iron ore and coal — were largely flat.

A buy for income

The boost provided by copper may not be repeated. But management expects the markets for all of its commodities to remain fairly stable and well supported over the next few years.

I believe shareholders should continue to enjoy generous dividends for as long as the board resists the temptation to splurge on costly growth projects. Despite the risk that profit growth could flatten out, I think BHP’s well-supported forecast yield of 4.1% is enough to justify an income buy.

A 5.5% yield I’d buy

My next stock offers a more generous yield of 5.5%. Home and motor insurance group Admiral Group (LSE: ADM) has a strong reputation as an income stock. Its business model allows the group to pay out most of its earnings as cash each year.

This stock has been a terrific success story for investors and fans include my fellow Fool Rupert Hargreaves. Since floating in 2004, Admiral’s share price has risen six-fold. Although the shares fell by 50% during the second half of 2011, they’ve since bounced back and are currently only 13% off last year’s all-time highs.

Popularity should deliver profit growth

Admiral is also a popular business. Customer numbers rose by 13% to 5.46m during the 12 months to 30 June 2017, with 4.34m customers in the UK alone.

Competitive conditions in the insurance sector meant that customer growth didn’t feed through to the firm’s earnings, which only rose by 3%. But I believe that the group’s scale should translate into higher profits when market conditions do become more favourable.

Analysts expect earnings per share to rise by nearly 5% in 2018, putting the stock on a forecast P/E of 16. The dividend policy is expected to remain generous, giving a prospective yield of 5.8%. In my opinion, this insurance stock remains a solid income buy.

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.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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