Why I’d ditch big faller Hastings and buy this FTSE 100 8% dividend

Rising costs at Hastings Group Hldg plc (LON: HSTG) are sounding alarm bells. Roland Head suggests playing it safe with this FTSE 100 (INDEXFTSE: UKX) pick.

| 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.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

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.

Profit warnings are a fact of life for investors. Today it was the turn of FTSE 250 motor and home insurer Hastings Group (LSE: HSTG).

The Hastings share price is down by 15%, following a trading update that the market has taken as a profit warning. I can see why. I think Friday’s numbers have highlighted some worrying trends.

Rising losses

Hastings boss Toby van der Meer says he’s “really pleased” with the company’s progress. But although premium income rose by 4% to £235.5m during the first quarter and policy numbers climbed 3%, the underlying news isn’t great.

The group’s net revenue, which excludes amounts paid to reinsurers, fell by 1% to £183.1m. And claims costs continued to rise, thanks to rising car repair costs and property damage claims.

As a result, this year’s loss ratio will be at the upper end of its 75%-79% range. An insurer’s loss ratio measures how much of its premium income is used to settle claims. Hastings’ costs have been rising steadily, as this table shows:


Loss ratio

Expense ratio







2019 (forecast)

“upper end” of 75%-79% range

“Certain expenses … will increase”

I’ve also included Hastings’ expense ratio in this table. This measures the insurer’s operating expenses, relative to income from insurance premiums.

As you can see, expenses have been rising as well as claims costs. The company cautioned today that changes to VAT rules and other industry-specific costs mean that “certain expenses” are expected to increase in 2019.

Is Hastings’ 6%+ dividend safe?

Today’s figures suggest to me that the insurance operations will remain profitable this year, but at a slightly lower level. This isn’t a disaster.

However, the update was widely seen as a profit warning, a view I share. Such warnings often mark the start of a period of weak performance.

Hastings shares could be cheap at this level, but they could have further to fall. We’ll know more later this year. In the meantime, I wouldn’t take the risk. If I owned the shares I’d hold, but I wouldn’t buy more after today’s news.

This 8% payout looks safe to me

Insurers are struggling with costs. But one sector that’s delivering bumper returns for investors is mining. One of my top picks in this sector is Anglo-Aussie giant BHP Group (LSE: BHP).

After being traumatised by the 2015 mining crash, mining bosses are being very careful with their cash. Spending on major new projects is being tightly controlled, as are operating costs. Against this backdrop, strong commodity prices mean that profits have risen fast.

BHP is expected to report a full-year profit of more than $10bn in 2018/19, compared to $3.7bn in 2017/18. This strong growth means that the firm’s operations are producing a lot of spare cash.

Shareholders are expected to receive dividends totalling $2.04 per share this year, which gives the stock a yield of 8.8%. Although this includes a one-off return from the sale of the group’s US shale operations, dividend forecasts for 2019/20 still indicate a hefty 6.1% dividend yield.

My view: BHP’s mix of iron ore, copper and petroleum assets are all large scale and fairly low cost. I see this diversified group as one of the best ways to make money from mining. I’d buy the shares for income today, and then wait for the next market slump to buy more at a lower level.

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.

More on Investing Articles

Investing Articles

£3,000 in savings? Here’s how I’d use that to start earning a monthly passive income

Our writer digs into the details of how spending a few thousand pounds on dividend shares now could help him…

Read more »

Investing Articles

Here’s what dividend forecasts could do for the BP share price in the next three years

I can understand why the BP share price is low, as oil's increasingly seen as evil. But BP's a cash…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

This FTSE 100 Dividend Aristocrat is on sale now

Stephen Wright thinks Croda International’s impressive dividend record means it could be the best FTSE 100 stock to add to…

Read more »

Investing Articles

3 shares I’d buy for passive income if I was retiring early

Roland Head profiles three FTSE 350 dividend shares he’d like to buy for their passive income to support an early…

Read more »

Investing Articles

Here’s how many Aviva shares I’d need for £1,000 a year in passive income

Our writer has been buying shares of this FTSE 100 insurer, but how many would he need to aim for…

Read more »

Female Doctor In White Coat Having Meeting With Woman Patient In Office
Investing Articles

1 incredible growth stock I can’t find on the FTSE 100

The FTSE 100 offers us a lot of interesting investment opportunities, but there's not much in the way of traditional…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

With an £8K lump sum, I could create an annual second income worth £5,347

This Fool explains how a second income is achievable by using a lump sum, investing in stocks, and the magic…

Read more »

Investing Articles

Here’s what dividend forecasts could do for the BT share price in the next 3 years

With the BT share price down so low, the dividend looks very nice indeed. The company's debt is off-putting, though.…

Read more »