What should you do when a promising trading update from a company you own for income causes the shares to fall? You can change your mind and sell, buy more, or sit tight and do nothing.
Personally I don’t sell dividend stocks based on share price movements alone. Unless I feel something serious has gone wrong, such as a major profit warning, I’ll sit tight. I may even buy more shares.
A potential bargain
The share price of motor and home insurer Hastings Group (LSE: HSTG) fell by 7% in early trade, after the company issued a first-quarter trading update.
Despite this poor reaction, the figures seemed quite good to me. Live customer policies rose to 2.67m, a 10% increase on one year ago. Net revenue rose by 12% to £184.5m during the first three months of the year. This increase in sales left the group’s share of the UK private car insurance market at 7.4% at the end of March, up from 6.7% one year earlier.
Although a surge of collisions in snow and ice during the quarter added to claims costs, management expects full-year claims levels to be within its target range.
Why I’d buy this fall
One reason for today’s slump could be another warning of “continued price competition”.
However, my reading of the figures suggests the group’s pricing power is still quite good. Net revenue per customer has risen from £257 to £275 over the last year. New digital technology is helping to cut costs and should help to speed up the claims process.
Hastings’ shares have now fallen by nearly 20% from their December highs of 320p. The stock now trades on 11 times 2018 forecast earnings with a prospective yield of 5.2%. This dividend looks safe enough to me. I believe the shares are a good buy for income at current levels.
Another 5% yield I’d buy and forget
Another company whose shares have fallen steadily this year is sweetener and ingredients specialist Tate & Lyle (LSE: TATE). Shares in this 150-year old firm have lost 25% of their value over the last year, even as trading stabilised and the dividend was maintained.
This company’s products are used in a wide range of processed and packaged foods, such as soups, sauces, cakes and soft drinks. Its customers include many of the world’s largest food producers.
If demand for this kind of convenience food ever changes dramatically, the firm could be wrong-footed and suffer falling sales in the future. Personally, I’m not too concerned by this risk. Tate & Lyle has adapted and survived for more than 150 years. I suspect it will continue to do so.
A sticky income
What interests me is that the stock looks like a low-risk dividend buy. Debt is low and cash generation is generally good. Profits have now stabilised after a difficult few years, and the group’s adjusted earnings are expected to rise modestly this year.
Broker forecast put the stock on a forecast P/E of 12 with a well-covered yield of 5%. This dividend hasn’t been cut since at least 1997, the earliest date for which I could find records. In my view these shares could be an excellent buy for investors wanting a buy-and-forget income.
