A struggling mid-cap I’d dump for this FTSE 100 dividend stock yielding 9%!

This FTSE 100 (INDEXFTSE:UKX) offers one of the best dividend yields around. It’s time to take advantage says Rupert Hargreaves. But what to buy?

| 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.

Shares in financial services group Just (LSE: JUST) currently look like a steal. The stock is trading at a forward P/E ratio of just 3.5 and a price to tangible book value of 0.3.

However, the stock is cheap for a reason. Just is a significant provider of so-called lifetime mortgages. These products allow retirees to take out equity from the value of their homes, which they can then use to cover living expenses. When they pass away, Just uses proceeds from the sale of the house to recoup its initial investment plus interest.

Regulators have these products in the crosshairs because they believe companies could be taking on more risk than is acceptable. A sudden fall in home prices could destabilise the entire model and leave businesses like Just out of pocket. 

Taking action

Management has been trying to reassure investors that it has the situation under control by improving its capital ratios. But these efforts are being hampered by falling levels of business. According to the company’s trading update for the first six months of 2019, underlying profit declined 27%, and new business operating profit declined 39%.

In its update, the business also says it is reducing “new business strain” and is reducing “Defined Benefit longevity risk through reinsurance.” These actions have helped improve Just’s capital position, but the company is also warning that it might have to raise additional funds.

All in all, there are just so many moving parts here, I think it’s probably best for investors to avoid Just entirely (although my Foolish colleague Harvey Jones seems to disagree). 

There are many other companies out there on the market that offer a better risk-reward profile, one of which is FTSE 100 dividend champion Aviva (LSE: AV).

A bigger, better buy

Just and Aviva operate in basically the same market, but Aviva has size on its side. 

The group is also well-diversified with operations around the world. More importantly, it also has a much stronger balance sheet. 

Indeed, at the end of 2018, Aviva reported a Solvency II capital surplus of £12bn with a Solvency II cover ratio of 204%. At the end of June, Just’s Solvency II cover ratio was only 149%. 

Balance sheet strength isn’t the only difference between these two companies. Aviva is also far more profitable. Just has reported losses in two of the past six years. During the same time frame, Aviva has reported a cumulative net income of more than £7bn. 

As the numbers above show, Aviva is a much stronger business than its smaller peer, but despite its attractive fundamentals, the stock is currently trading at a bargain-basement forward P/E of just six. City analysts have pencilled in earnings per share growth of 69% this year following an increase of 4% in 2018 and 84% in 2017.

Analysts are also expecting the company to announce a full-year dividend of 31.1p, giving a forward dividend yield of 8.3% at current prices. In my opinion, this valuation is too good to pass up. That’s why I’d avoid shares in Just and buy Aviva instead. The larger business has much more attractive fundamentals.

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.

Rupert Hargreaves owns no share 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

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

2 overlooked cheap shares I’m tipping to eventually soar

These two cheap shares may not be obvious bargains, but our writer explains the investment case behind buying them for…

Read more »

Investing Articles

1 no-brainer pick I’d love to buy for my Stocks & Shares ISA!

A Stocks & Shares ISA is a great investment vehicle for our writer. Here she explains why, and one stock…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

Just released: our 3 best dividend-focused stocks to buy before May [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Will the Rolls-Royce share price keep rising in 2024?

With the Rolls-Royce share price going on a surge, this Fool wants to look forward to where it could potentially…

Read more »

Investing Articles

£10k in an ISA? Here’s how I’d target a regular £30k+ second income stream

Reliable dividends can help provide a lot more financial freedom. Here's how I'd aim for a substantial second income inside…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

Lloyds share price hanging on to 50p ahead of Wednesday’s Q1 earnings report. Where to now?

Down in April and with low earnings expected this week, Mark David Hartley investigates where the Lloyds share price might…

Read more »

artificial intelligence investing algorithms
Investing Articles

Everyone’s talking about AI! Here’s 1 FTSE stock to consider buying for exposure

A hot topic right now is artificial intelligence (AI). This Fool explains how this FTSE stock could offer investors an…

Read more »

British Pennies on a Pound Note
Investing Articles

1 penny stock I’d buy today while it is 99p

Ben McPoland highlights Windward (AIM:WNWD), a fast-growing penny stock that could benefit from the artificial intelligence revolution.

Read more »