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

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

2017

73%

14.0%

2018

75%

14.4%

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.

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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.