Over the past five decades, the group has completed a string of deals in the sector snapping up some of the most significant players in the market.

Buffett likes to buy well-run, profitable insurance companies that have a track record of sensible underwriting. Firms like Lancashire Holdings (LSE: LRE).

Well-diversified

Lancashire is really three different businesses: Lancashire, Cathedral and Kinesis. As my Foolish colleague Kirsteen Mackay recently explained, Lancashire and Cathedral provide specialist insurance against catastrophic events such as hurricanes. They also offer unique insurance policies for the property, marine aviation and energy sectors.

On top of this, the Kinesis segment manages reinsurance for the business. It offers a management service for third parties who want to invest in the insurance industry but don’t know where to start.

Lancashire’s profitability track record is outstanding. The group’s 10-year average combined ratio (a measure of insurer profitability) is around 70%, compared to the industry average of nearly 100% (the lower the ratio, the better).

On top of this, management has adopted a policy of paying out as much capital as possible to shareholders. Shares in the insurance group currently support a regular dividend yield of less than 2%, but the company regularly distributes special dividends, which has jacked up the yield to more than 10% in the past.

Analysts are forecasting a total yield of 5.4% for 2019.

Sector leader

Another insurance business that stands out as a sector leader is Sabre Insurance (LSE: SBRE). Sabre stands out because the company has managed to carve out a niche for itself in the highly competitive car insurance sector.

The group’s three direct brands are Go Girl, Insure2Drive and Drive Smart, all tailored specifically to cater to individual needs. While they may be slightly more expensive than other policies, customers seem happy.

Revenue has grown at a compound annual rate of around 10% over the past five years, and City analysts are expecting the company to report a net profit of £50.2m for 2019.

Based on these figures, the stock is currently trading at a forward P/E of 15.3. This is slightly above what I would consider an appropriate valuation for a company that’s for not expected to report any earnings growth for the next two years. However, like Lancashire, Sabre likes to reward its investors with cash payouts.

This year, city analysts are forecasting a full-year dividend of 20.2p, which gives a dividend yield of 6.8% on the current share price. Sabre’s niche brands, as well as the company’s customer loyalty and cash generation, are the key reasons why I believe Buffett would be interested in adding this stock to his portfolio.

The post 2 FTSE 250 dividend stocks yielding 6% I think Warren Buffett would buy appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns shares in Berkshire Hathaway and Lancashire Holdings. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares). The Motley Fool UK has the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares) and short January 2021 $200 puts on Berkshire Hathaway (B shares). 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.

Today I want to look at the good (and bad) news from the FTSE 100 firm’s first-quarter numbers, and give my view on the shares. I’ll also take a look a smaller dividend stock with a tempting 6%+ yield.

Ahead of expectations

A new two-part HIV treatment and the shingles vaccine Shingrix helped Glaxo deliver sales and profits that were comfortably ahead of analysts’ forecasts during the quarter.

The group’s sales rose by 5% to £7.7bn, compared to forecasts of £7.5bn. Adjusted earnings climbed 18% to 30.1p per share, comfortably ahead of forecasts of 26.1p.

Several new respiratory products also delivered strong growth, with sales rising by 25% to £631m. However, this gain carries a sting in the tail, as I’ll explain.

Cheap copy drugs pose threat

Glaxo warned that despite its strong first-quarter performance, expectations for a 5%-9% fall in adjusted earnings this year are unchanged.

Why? One of the firm’s most successful medicines, asthma drug Advair, is likely to start losing sales to a much cheaper generic alternative, which was recently approved by the US authorities.

Forecasts for the full year are also dependent on the firm’s consumer healthcare deal with Pfizer completing by the end of the year. As I’ve explained before, I think this deal should eventually help to secure Glaxo’s dividend and reduce its debt load.

For now, the firm expects to maintain the dividend payout at 80p per share, giving Glaxo stock a forecast dividend yield of 5.1%. Although this payout looks stretched to me, I still think these shares are likely to be a good long-term buy for income investors.

Should you buy this 6.6% yield?

Insurance firm Lancashire Holdings (LSE: LRE) is a long-time favourite of mine. This specialist business provides insurance for large valuable assets such as oil rigs, ships and airliners.

The firm’s shares offer a tempting forecast dividend yield of 6.6% for 2019, but despite a solid trading update today, I’m not sure that now is the time to rush into this stock.

That might seem a strange view, given the insurer’s attractive dividend yield. However, the firm’s payout is largely dependent on a special dividend the firm pays each year based on how much surplus capital it has.

Various factors influence this payout, including the cost of major claims and how many new business opportunities the company has. At this early stage in the year, it’s hard to say whether current forecasts will prove accurate. However, last year’s dividend payout of $0.35 per share was significantly below forecasts in October for $0.44 per share.

Although analysts have pencilled in a payout of $0.59 per share for 2019, there’s no guarantee this will be possible.

Chief executive Alex Maloney says that the firm is seeing early evidence of a return to stronger pricing. But premiums written by it only rose by 0.6% to $217.2m during the first quarter, suggesting any improvement in pricing power is limited.

Lancashire stock now trades at nearly 14 times 2019 forecast earnings and at 1.6 times its book value. In my view that’s probably high enough. I rate Lancashire as a long-term income stock. But I’d wait for the shares to dip before buying. I’d hold.

The post The GSK share price: Is now the time to buy? appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.

For Foolish investors with a long-term view, this can be a fantastic buying opportunity. In this piece I’m going to take a look at three stocks which I think could deliver FTSE-beating returns in 2019 and beyond.

The picture looks good to me

Investors were in a rush to sell FTSE 100 broadcaster ITV (LSE: ITV) before Christmas. The shares have fallen by around 15% since late November, taking them to a five-year low.

I don’t think ITV’s performance in 2018 justifies such harsh treatment. During the first nine months of 2018, the group reported increased revenue from advertising (+2%), online (+43%) and the ITV studios production business (+10%).

One concern is that adjusted earnings are expected to fall by 4.5% to 15.3p per share. This will be the second year in which earnings have fallen, and analysts expect to see a further drop in 2019.

However, the company’s debt levels remain comfortable, in my view, and cash generation is strong. This year’s forecast dividend of 8.1p per share should be covered 1.9 times by earnings, which looks safe to me.

With the shares trading on just 9 times 2019 forecast earnings and offering a 6.5% yield, I think ITV is too cheap to ignore, despite the uncertain outlook.

An income gem?

You may not be familiar with FTSE 250 dividend stock Lancashire Holdings (LSE: LRE). This London-based firm is a specialist insurer, providing cover against natural disasters for assets such as commercial buildings, shipping and oil rigs.

The group has an impressive track record of returning surplus cash to shareholders through special dividends. The yield available on the shares has topped 10% on a number of occasions, and always been paid.

Unfortunately, 2017 saw the firm hit with a costly run of major claims, following a series of hurricanes, earthquakes and wildfires in the Caribbean, Mexico and the United States. The group reported a loss for the year and didn’t pay a special dividend.

Conditions have improved in 2018. The group is expected to pay a total dividend of $0.36 per share, giving the stock a yield of 4.8%. This yield is expected to rise to 7.7% in 2019. In my view, buying shares in Lancashire could be a good way to diversify a traditional income portfolio. I rate the stock as a long-term buy.

A super sin stock

If you’re open to investing in so-called sin stocks, then I believe online gaming operator 888 Holdings (LSE: 888) could be worth a closer look.

The firm’s shares jumped 10% in one day before Christmas, when the company confirmed profit forecasts for 2018. These suggest that the group’s adjusted earnings will be broadly unchanged at $0.20 per share this year, a forecast that’s repeated for 2019.

Flat profits can be a concern. But I don’t expect this situation to stay the same forever. Management believes the recent deregulation of the US sports betting industry will provide “significant growth opportunities” for 888, which has a lot of experience in providing such services online.

888 shares trade on 12 times forecast earnings and offer a well-supported dividend yield of 6%. In my view, this could be a good time to start buying.

The post 3 big dividend stocks I’d buy to beat the FTSE 100 in 2019 appeared first on The Twelfth Magpie.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended ITV. 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.

From its IPO to 2017, the insurance group had distributed more than 100% of its earned profits to investors, giving an average annual dividend of more than 7%.

Unfortunately, a series of devastating natural catastrophes last year hit the insurer’s bottom line and, as a result, for the first time since going public, Lancashire didn’t issue a full-year special payout.

Unique dividend model

Because of the nature of the insurance business, Lancashire has adopted a unique dividend model. The company distributes a small dividend once every quarter and once a year, and (towards the end of the year) it declares a large distribution paying out any excess profits.

Last year, the group skipped the payout as insurance losses wiped out profits for the whole year, leaving little for investors. This year, however, analysts expected the company to reinstate its special annual payout. Current projections estimate a total dividend of $0.44 for 2018, rising to $0.59 for 2019. Based on these numbers, the stock could yield 5.8% and 7.7% for 2018 and 2019, respectively.

I believe these figures might be a tad optimistic, especially for 2018, as today the company revealed that catastrophe losses in the third quarter will now wipe out all of the firm’s profit for the period. While management still expects a positive result for the full-year, a Q3 loss could mean a lower distribution than the City expects for 2018.

Still, despite the short-term drop in profitability, I’m positive on the long-term outlook for this business. I think now could be a great time to buy the stock.

Indeed, right now, shares in the Lloyd’s of London insurer are trading at a forward P/E of just 11. What’s more, insurers tend to overestimate losses when they are first announced, so I’m optimistic that Lancashire’s initial losses for the third quarter will not turn out to be as bad as expected. With this being the case, I’m looking to add to my position in the next few days.

Cash backup

If Lancashire is not your cup of tea, another income play that currently looks cheap to me is Jupiter Fund Management (LSE: JUP). 

There’s a lot to like about this City institution. For a start, the stock currently supports a dividend yield of 7.1%, and trades at a forward P/E of just 11.9. Earnings growth has allowed management to increase the firm’s payout at an average annual rate of 14.2% for the past six years.

And I’m struggling to see why the market has awarded the company such a low valuation. Earnings per share (EPS) are expected to contract by approximately 3.3% for 2018 to 32.7p, which is disappointing. But a recovery, albeit a small one, is scheduled for 2019 when EPS growth is projected to be in the region of 0.6%. Not much, but better than a decline.

The one red flag that I can see here is that Jupiter’s dividend is only covered 1.2 times by EPS, below what I’d usually consider comfortable for a dividend. Typically, I’d want to see a cover of 1.5 times, or more. However, I’m willing to overlook this weakness as Jupiter has £313m of cash on its balance sheet, enough to sustain the distribution for two years in the worst case scenario.

The post These two top FTSE 250 dividend stocks yielding 7%+ are on sale now appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns shares in Lancashire Holdings. 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.

The Saga share price has regained some ground since last December’s profit warning. But longer-term shareholders will still be painfully aware that the stock is worth about 35% less than it was one year ago.

Today I’m going to look at the firm’s latest figures and give my verdict on whether the shares deserve a buy rating. I’ll also look at a rather different insurer with attractive long-term income potential.

Good progress in difficult conditions

Saga’s underlying pre-tax profit fell by 3.7% to £106.8m during the six months to 31 July. The company said that new customer acquisition costs were higher in a competitive market, but noted that customer retention had improved in its insurance business.

Reassuringly, operating cash flow remained unchanged at £89.5m. Net debt was £429.7m at the end of July, down slightly from £432m at the end of January. Debt is now equivalent to 1.77x adjusted cash earnings. This looks manageable to me. I think that a dividend cut is unlikely unless new problems arise.

More customers

Customer numbers for insurance have now returned to levels last seen during the first half of 2017, thanks to a 19% increase in motor and home insurance policies. Another bonus is that 44% of customers now pay for more than one insurance product. According to the firm, this is an “industry leading level of multiple product holdings”.

This growth is probably being helped by the increasing membership of the group’s Possibilities loyalty scheme, which has risen from “over half a million” in April to 850,000 today.

What seems to be more difficult is translating higher customer numbers into profit growth. In today’s results, chief executive Lance Batchelor says the group is benefiting from lower operating expenses but faces a “competitive pricing landscape”.

The company’s profits have now been fairly flat for several years. This isn’t ideal but I think the forecast P/E of 9.5 reflects this risk, especially as the 7.1% dividend yield appears to be sustainable.

I’d be happy to buy Saga at current levels.

A high-yield alternative

By pinning its dividend at a high level, Saga runs the risk of disappointing investors if it has to cut the payout. An alternative approach used by some insurers is to pay a more modest dividend and to supplement this with special dividends when spare cash is available.

That’s the method used by Lancashire Holdings (LSE: LRE), which has earned a reputation for dividend yields as high as 10% in recent years. This specialist insurer covers large, valuable assets such as merchant ships and major buildings.

Markets have been tough in recent years, due to increased competition. However, last year’s hurricane season in North America is now providing some support for higher premium rates. Chief executive Alex Maloney says that pricing peaked in January but the group has enjoyed “rate increases across most of our lines of business”.

Broker forecasts suggest a 2018 dividend yield of 5.1%, rising to 7.2% in 2019. My Foolish colleague Rupert Hargreaves believes a higher payout might be possible.

In either case, I rate this specialist firm as a good long-term income buy that should diversify most portfolios. This is a stock I’d be happy to buy and hold, averaging down into any market crashes.

The post Thinking of buying the Saga share price? Read this first appeared first on The Twelfth Magpie.

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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.

From premium to discount

HICL ended the year with investments in 116 infrastructure projects, up from 114 at the previous year-end. Investments in public private partnership (PPP) projects — for example, schools and hospitals — represented 74% of the portfolio by value. Demand-based assets (e.g. toll roads) accounted for 18% and regulated assets (e.g. water) for 8%. Geographical diversification was of the order of: UK (80%), Eurozone (10%), North America (7%) and Australia (3%).

The shares are trading at 144p, a tad lower on the day, and considerably lower than their all-time high of 184p, achieved less than two years ago. Over that period, NAV per share has increased from 142.2p to 149.6p and the annual dividend from 7.43p to 7.85p. As such, the shares have moved from a 29% premium to NAV to a 4% discount and the dividend yield has increased from 4% to 5.5%.

Too pessimistic

I believe market sentiment has become overly pessimistic about the PPP sector, notably as a result of the collapse of Carillion. As far as HICL is concerned, despite Carillion being the group’s largest facilities management counterparty (10 projects and 14% of the portfolio by value), the hit as at 31 March was a reduction in NAV representing just 2%. This shows the value of HICL’s diversification and the company and its co-investors appear to be well advanced in transitioning the 10 projects to new long-term facilities management subcontractors.

HICL notes that in the current environment, the outlook for private investment in new UK infrastructure projects is muted. However, longer term, I believe the value of private capital in UK infrastructure investment will prevail. And with HICL continuing to see opportunities in Europe and North America, I rate the stock a ‘buy’ at its current depressed price.

Strong recovery in prospect

Insurer Lancashire(LSE: LRE) is another FTSE 250 firm that I hold in high regard but that has also been out of favour with investors recently. It’s current share price of 614p compares with a 52-week high of 760p. The company has a history of paying out almost all of its profits in dividends to shareholders and despite the recent weakness of the shares, it’s delivered a 10-year total shareholder return of over 15% per annum.

Lancashire was hit by heavy catastrophe losses from hurricanes and wildfires last year. However, good insurers take such occasional but inevitable setbacks in their stride. Lancashire has done so, and first-quarter results released earlier this month show the company is taking full advantage of a more favourable underwriting environment.

City analysts are forecasting earnings per share this year of $0.63 (47.4p at current exchange rates) and a dividend of $0.45 (33.8p). At the current share price, the price-to-earnings ratio of 13 and dividend yield of 5.5% represent great value in my book. As with HICL, Lancashire is a FTSE 250 stock I’d happily buy today alongside some select FTSE 100 dividend champions.

The post Why I’d buy these FTSE 250 stocks with 5.5% yields appeared first on The Twelfth Magpie.

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G A Chester 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.

While this was disappointing, the fallout from these catastrophes has allowed insurers to increase rates charged to customers for the first time in several years. As Lancashire’s first quarter results show, the company is taking full advantage of the favourable environment to make up for last year’s issues.

Profits rising

Today the insurance group reported that pre-tax profits for the first quarter of 2018 nearly doubled to $42.4m on gross insurance premiums of $216m. 

Higher rates charged to customers as well as a benign loss environment help boost profits. The company’s combined ratio — a measure of underwriting profitability — improved to 65.2% from 85.6% (a ratio of less than 100% indicates a profit).

Based on these figures, I’m expecting the company to announce a bumper dividend payout towards the end of the year. Lancashire has a history of paying out almost all of its profit to shareholders via special dividends. Unfortunately, last year due to catastrophe losses, the group decided not to issue a special payout as it needed the cash to meet claims. 

But with profits rising, it’s more than likely that the group will reinstate its distribution policy towards the end of the year. City analysts have pencilled in a special distribution of approximately 30p per share, giving a dividend yield for the full year of 5.6%. However, if profits continue at the current rate for the rest of the year, according to my figures, Lancashire is on track to earn a net income of $170m for 2018, similar to the level recorded for 2015 and 2016. 

In both of these years, the company paid out a special dividend of 60p. With this being the case, I believe the City’s 30p estimate is far too conservative. A special payout of 60p per share would leave the stock yielding 9.6%.

Growth champion 

I plan to own Lancashire as an income stock forever and to complement it, I’m looking at growth stock XLMedia (LSE: XLM).

XLM looks to me to be a long-term growth story. Even though the City is expecting earnings per share to fall this year, a rebound is planned for 2019 and in the years following. With an operating profit margin of close to 30%, the group is also a cash cow. There’s no debt on the balance sheet, and cash currently makes up 10% of the market capitalisation.

Based on these numbers, I believe the company has plenty of cash available to reinvest in growth initiatives and return to investors at the same time. Cash distributions combined with earnings growth should result in highly attractive returns for investors. 

Despite these returns on offer, the shares currently look undervalued, trading at a forward P/E of 14.1 (or 12.3 excluding the cash on the balance sheet). They also support a market average dividend yield of 3.5%.

The post One 8% dividend stock and one growth stock I’d buy and hold forever appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns shares in Lancashire Holdings. 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.

He built his stake in Barratt during 2017, as part of a broad repositioning of his funds to capture what he sees as “a contrarian opportunity that has emerged in domestic cyclical companies where valuations are too low and future growth expectations far too modest.”

During October, he sold his holding of mid-cap international insurer Lancashire (LSE: LRE) to further increase his stake in Barratt and a number of other UK-focused FTSE 100 stocks. I’m not convinced that selling Lancashire, which announced its annual results today, was a good move. At the same time, I reckon buying Barratt is fraught with danger.

Lots of positives

The UK’s largest housbuilder is set to release its interim results for the six months ended 31 December next Wednesday. They’re going to be good because the company told us in January that it had “delivered a strong performance in the first half.”

In the same update, Barratt pointed to a string of positive features for the business, including good mortgage availability, a supportive Government policy environment, attractive land opportunities and its “healthy forward order book.” And the board reiterated its commitment to pay a £175m special dividend for the year.

At a current share price of 550p (over 20% down from last year’s post-financial-crisis high of above 700p), Barratt trades on just 8.5 times forecast earnings, while the forecast dividend (ordinary plus special) gives a yield of 7.9%. What’s not to like?

Downside risk

I have several concerns. Housebuilders have enjoyed a terrific bull run since the financial crisis, but this a notoriously cyclical boom-and-bust industry. Housing fundamentals may look good currently and the earnings multiple and dividend yield may scream ‘bargain’ but things can change quickly and other metrics — price-to-book and margins — suggest we’re at or near the peak of the cycle.

And with government stimulus measures also at full throttle and rising scepticism about their effectiveness, I believe risk has turned very much to the downside. As such, I’m inclined to rate Barratt a ‘sell’.

Dealing with catastrophe

Insurance is also a cyclical business and as Lancashire’s results today revealed, 2017 was a bad year for catastrophe losses, with hurricanes and wildfires taking a heavy toll. The company posted a $71m loss compared with a $154m profit in 2016.

However, managing such extreme years is all part of the business. While a loss is never welcome, the company was pleased that its risk management model passed this “real-time ‘stress test’.” In fact, Lancashire is a consistently well-managed business and has returned almost all of its profits to investors via dividends since becoming a public company. The annualised total return over the past 10 years is an impressive 16%, compared with 6% for the FTSE 100.

There was no special dividend for 2017, with shareholders having to settle for the modest regular ordinary dividend of $0.15 (10.6p at current exchange rates). The shares are almost 7% down on the day at 610p but the City expects a rebound in earnings and dividends in 2018. The forward P/E is 13, the prospective yield is 6.2% and I rate the stock a ‘buy’.

The post Neil Woodford’s favourite housebuilder isn’t the only 6%+ yielder on offer today appeared first on The Twelfth Magpie.

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G A Chester 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.

Shares in the utility have slumped by over 40% year-to-date thanks to worries about struggling growth, and the sustainability of the dividend.

The latest knock to the share price came at the end of November when the firm announced that it lost about 823,000 customers in just four months (after a decision to raise rates by 12.5%). As well as domestic struggles, the group’s US industrial customer division is suffering from excessive competition in northeastern power markets, and pre-tax profit for 2017 from this segment is expected to slide to £80m, from £220m last year.

City analysts now expect the company to report earnings per share for the year of 12.5p, more than 50% below 2013’s high of 26.6p and down from last year’s 16.8p. At 12.5p, earnings barely cover the dividend payout, which analysts expect to be 12p for the full year.

Dividend reputation in jeopardy 

Shares in Centrica currently yield around 8%, showcasing investor sentiment towards the stock. A yield in the high single-digits usually indicates that the market believes the payout is unsustainable. As well as the company’s own woes, management also has to contend with the threat of possible government regulatory action.

While no action against the company my ever materialise, these threats have dented investor sentiment and it may be some time before the market has regained its confidence in Centrica’s outlook. 

Centrica is facing many headwinds and even though the shares yield more than double the market average, I would avoid this dividend stock. One stock I own as a replacement is Lancashire Holdings (LSE: LRE).

Lloyd’s insurer Lancashire is an income champion. Since becoming a public company, the group has returned almost all of its profits to investors via dividends. 

However, due to the nature of the insurance business, where income can be lumpy depending on claims, Lancashire’s regular dividend yield is hardly anything to get excited about, but management uses a flexible special dividend policy to return cash to investors. For the past five years, special payouts have pushed the annualised dividend yield above 10%.

Buy on weakness

Unfortunately this year, thanks to losses from hurricanes in the US, Lancashire is expected to report a loss for the full year and, as a result, is not giving investors a special payout. Nonetheless, barring any unforeseen developments, City analysts expect shares in the company to yield between 6% and 7% next year as profits return. In the meantime, there’s the group’s regular dividend for investors to look forward to, which currently works out at around 1.5%.

While one year without a special dividend is disappointing, investors should not abandon Lancashire just yet. Its impressive record of dividends shows that management is committed to returning as much cash to investors as possible.

The post Why I’d avoid Centrica plc for this dividend share you might regret not buying appeared first on The Twelfth Magpie.

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Rupert Hargreaves owns shares in Lancashire Holdings. 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.

Today I want to look at two dividend stocks in the insurance sector, one of which I own myself — and both of which are owned by top fund manager Neil Woodford.

The specialist choice

Lancashire Holdings Limited (LSE: LRE) is a specialist insurer which provides insurance against assets such as aircraft, ships and oil rigs.

This year’s damaging hurricane season has brought to an end a run of quiet years without major payouts. The group’s return on equity for the third quarter has fallen to -10.4%,  from +3.1% during the same period last year.

These losses aren’t unexpected. The group’s loss estimate of $106m-$212m is described as “comfortably within our expectations” by chief executive Alex Maloney.

For shareholders, there’s good news and bad. In the short term, the bad news is that the bumper special dividends paid in recent years will be stopped. Management believes that market conditions in 2018 will allow it to put fresh capital to work, so it won’t be returning spare cash to shareholders.

This means that the dividend yields of 7-10% enjoyed by shareholders will come to an end for now, at least. Instead, shareholders will get Lancashire’s ordinary dividend, which gives a yield of about 1.5% at current prices.

The good news is that the company believes that this year’s string of major catastrophes mean that insurance rates are likely to rise. Rivals who have been under-pricing risk could run into problems and securing higher rates now should support profit and dividend growth in the future.

During the years I’ve been following this company, management commentary has always been consistent and accurate. I’m not surprised that Lancashire shares have risen by 20% since late September and investors are pricing in a more profitable future.

I suspect we may get a chance to buy the shares more cheaply when market enthusiasm calms a little. In any case, I rate this stock highly as a quality business.

I’m not selling yet

One of the oldest holdings in my own portfolio is currently Aviva (LSE: AV). This stock has been a great income investment for me and has delivered a healthy capital gain to date. But I’m not in any rush to sell just yet.

Chief executive Mark Wilson has been consistent in his focus on cash flow, profitability and balance sheet strength. The success of this approach seems clear to me. During the first half of this year, cash generation rose by 56% to £1,170m, while operating profit rose by 11% to £1,465m. The group’s Solvency II coverage ratio, a key regulatory measure, improved from 189% to 193%, putting the group on a level with key rivals.

Although Wilson has now delivered several years of consistent progress, the market has remained cautious and Aviva’s valuation still seems quite modest to me.

At around 515p, the shares trade on just 1.2 times their book value of 412p per share. The stock’s forecast P/E of 9.5 is lower than many rivals, and the forecast yield of 5.1% is above average for this sector. I’m seriously considering buying more for my portfolio.

The post Two Neil Woodford dividend stocks that could make you a millionaire appeared first on The Twelfth Magpie.

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Roland Head owns shares of Aviva. 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.