Pre-tax profit rose by 20% to $1.19bn at Asia-focused bank Standard Chartered (LSE: STAN) during the three months to 31 March. Although this was an impressive gain, the result was slightly below analysts’ forecasts for a profit of $1.21bn. As a result, the firm’s shares dipped slightly.
Personally, I don’t usually bother about small hits and misses like this, unless they suggest underlying problems. As a shareholder, I’m quite comfortable with today’s results. In addition to rising profits, the bank revealed a further fall in bad debt and reported “favourable” macroeconomic conditions in Asia.
I’d buy for income
Today’s update also showed us that revenue only rose by 7%. When you see profits rise more quickly than revenue, it normally means that profit margins are rising.
That seems to be the case here. Standard Chartered’s underlying return on equity rose to 7.6% on an annualised basis during Q1, compared to 6.3% in 2017.
Alongside this, the bank’s common equity tier one (CET1) ratio — a measure of surplus capital — rose from 13.6% to 13.9% during the quarter. Chief executive Bill Winters said this was “due mainly to profit accretion”.
This should be good news for dividend investors. What these ratios suggest is that the bank’s operations are generating an increasing amount of surplus cash. This should help to support the dividend, which is expected to rise by 114% to 24 cents per share this year.
Although this only gives the stock a forecast yield of 2.2%, I expect further big increases over the next few years. With the shares still trading at an attractive 12% discount to book value, I believe now could be a good time for income investors to start buying this stock.
Do you want a 6% yield today?
But it may take a few years for Standard Chartered to deliver a dividend yield above the FTSE 100 average of 3.9%. So if you’re looking for stocks that provide a bumper yield from day one, you may want to look elsewhere.
One option is home and motor insurance firm Admiral Group (LSE: ADM). This income favourite is expected to pay a total dividend of 119.6p per share in 2018, giving a forecast yield of 6%.
Admiral’s dividend record is outstanding, partly because of its business model. The company reinsures a lot of the insurance policies it sells. This effectively transfers the risk to another insurer in return for a fixed fee.
By doing this, management is able to generate a high level of free cash flow. The result is that annual dividend payouts are usually close to 100% of earnings per share.
A 55% return in one year
The success of this approach becomes obvious when you look at the group’s accounts. In 2017, Admiral generated a return on equity of 55%. What this shows is that last year’s after-tax profits represented 55% of the average book value of the firm during the year.
Very few companies can produce this kind of return consistently. And although Admiral’s attempts to expand overseas have not yet turned profitable, I think it’s worth trusting management to continue pursuing this growth opportunity.
With the shares trading on 16 times earnings and offering a potential yield of 6%, I’d rate Admiral as an dividend buy in today’s market.
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Roland Head owns shares of Standard Chartered. The Motley Fool UK has recommended Standard Chartered. 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.