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

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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.

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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.

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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.

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