With inflation continuing to rise and forecast to move higher, stocks offering high levels of dividend growth could become more attractive to investors. In other words, a high yield may be insufficient if inflation remains stubbornly high over the medium term. Therefore, buying companies with low payout ratios and earnings growth potential could be a sound strategy. Here are two prime examples which could be worth buying today.

Mixed performance

Reporting on Thursday was specialist risk insurer Beazley (LSE: BEZ). Its trading statement for the first quarter of 2017 showed it has made a good start to the year, although its gross written premiums fell by 2%. Its premium rates on renewal business decreased by 1%, which is generally in line with the company’s expectations.

Looking ahead, Beazley has clear growth potential. Its recent acquisition of Creechurch Underwriters expands its speciality lines presence in Canada. This forms part of what appears to be a sound strategy to develop its non-US speciality lines business. Alongside this, the company will continue to focus on growth in the US, while also reorganising its life, accident and health business as well as political risks and contingency divisions. They will come together and could deliver synergies and improving profitability in the long run.

With Beazley trading on a price-to-earnings (P/E) ratio of 14.8, it seems to offer value for money at the present time. It yields 3%, which is 80 basis points lower than the FTSE 100’s dividend yield. However, with the company’s dividends being covered 2.3 times by profit, there appears to be scope for growth over the long term. Together with an upbeat outlook for the business given the changes it is making, now could be the right time to buy it.

Growth at a reasonable price

Also offering scope for higher dividends in future years is diversified property and casualty reinsurance specialist Novae Group (LSE: NVA). It currently pays out just 40% of its profit as a dividend. This figure could increase in future years and still provide the business with sufficient capital through which to invest for growth. As such, it would be unsurprising for dividend growth to at least match profit growth over the medium term.

Novae Group is forecast to record a rise in its bottom line of 17% in the current year, followed by further growth of 33% next year. This suggests a double-digit rise in shareholder payouts is on the cards. This could help to make the company’s dividend appeal much higher – especially since it currently has a rather lowly yield of 2.6%.

With Novae Group trading on a P/E ratio of 17.8, it seems to offer upside potential. When its rating is combined with the aforementioned growth rates, it equates to a price-to-earnings growth (PEG) ratio of just 0.7. This suggests that as well as strong income potential, it also offers scope for a significantly higher valuation.

The post 2 dividend growth stocks I’d consider buying in May appeared first on The Twelfth Magpie.

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Peter Stephens has no position in any 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.

Risky insurance?

Take Novae Group (LSE: NVA). It’s a lot smaller than the big players, with a market cap of under £400m. And its in a more risky sector of the business, as a specialist Lloyd’s insurance firm. 

Novae slashed its 2016 dividend after the Ogden discount rate was heavily cut — the effect of which is that people suffering serious injuries will receive significantly higher compensation payments. That has a knock-on effect across much of Novae’s business, slashing pre-tax profit for last year by 60%.

But being small also means being agile, and a Q1 trading update on Wednesday showed that the firm’s “withdrawal from certain casualty classes where we deem future profitability to be unsustainable” is already having a positive effect. Gross written premiums rose by 13.8% over the first quarter of last year, and though an investment return of 0.7% is down, it’s ahead of expectations at this stage.

Forecasts are suggesting a fairly speedy recovery, with EPS rises of 17% this year and 33% next, putting the shares on PEG ratings of 0.9 and 0.4 respectively — an attractive growth rating. The dividend should be coming back too, and though we’re only looking at yields of 2.6% to 2.7%, they’d be well covered by earnings and we should be seeing further progress in the coming years.

I see a strong future for Novae after its speedy reaction to the Ogden rate cut. At 619p the share price is down 26% since the news broke, and I reckon that’s oversold — I see an attractive long-term buy here.

Oil profits

My other pick, Cape (LSE: CIU), is a very different company. It’s in the oil and energy services business, and the falling prices that have assailed the sector have hurt and have kept the share price depressed. Earnings have been a bit erratic and are expected to remain pretty much flat for another couple of years, and the dividend was cut in half in 2016.

So why do I see Cape as a tasty buy right now?

It’s because the shares just look too cheap to me, on forward P/E multiples of under eight and with a dividend of around 3%, that pretty much matches the FTSE 100 average.

An update on Wednesday told of “a strong trading performance in the first quarter, largely driven by increased project volumes and excellent operational performance in the Asia Pacific region“. And though the firm says the North Sea and its coal sectors are still challenging, its order book looks good and UK margins are expected to improve.

Debt can be a problem with smaller companies in this sector, but Cape’s adjusted net debt actually fell in 2016, to £80.4m at the end of December. For a firm with a market cap of around £300m and revenues approaching £900m, I really don’t see a problem there.

The share price has picked up quite nicely since November, but at around the 240p level today I’m still seeing a long-term bargain on a short-term buying opportunity.

The post These cheap small-cap stocks could help you retire early appeared first on The Twelfth Magpie.

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Alan Oscroft has no position in any 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.

Today I’m looking at two companies where shareholders have had to accept big pay cuts. In both cases I think the decision to cut reflects well on management. Both companies have lagged the market over the last year, but now seem poised to deliver rising profits.

Is now the time for contrarian investors to start buying?

Ignore this one-off cost

Novae Group (LSE: NVA) is a specialist insurer that trades in a variety of sectors. One part of Novae’s operations deals with providing reinsurance for UK motor insurance firms.

Novae’s share price fell sharply last week after the firm admitted that the Ogden rate cut might result in a dividend cut.

The full scale of the damage became clear when Novae published its 2016 results today. Pre-tax profit fell from £59.1m pre-Ogden to £23.7m, while the group’s return on equity fell from 15.5% to 6.6%.

The final dividend was cut by 62.5% from 20p to just 7.5p, giving a total of 15p per share for the full year.

Novae shares fell sharply when markets opened, but have bounced back rapidly. I think I know why. Without the Ogden hit, the firm’s 2016 results would have been quite good. Gross written premiums rose from £787m to £901m. Pre-tax profit would have risen from £52.4m to £59.1m.

The latest broker forecasts suggest that Novae’s earnings will rise to 62.5p per share in 2017. That gives a forecast P/E ratio of 9.9 at the current price. Although it’s not yet clear how much of a dividend the group will pay in 2017, I’d expect a yield of at least 3%. Now could be a good time to take a closer look.

This ambitious move could pay off

When Majestic Wine (LSE: WINE) splashed out £70m to acquire Naked Wines in 2015, there was a sting in the tail for shareholders. The dividend was suspended to help pay for the deal. In fairness, this was a better option than overloading the balance sheet with debt. But progress so far has been mixed.

Although sales at the enlarged Majestic group have risen from £284m in 2014/15 to an expected level of £450.6m this year, profits have fallen sharply over the same period. Analysts expect Majestic to report a net profit of £9.4m for the year ending 28 March, down from £13.5m in 2015.

The problem is that Naked Wines isn’t yet reliably profitable and the group has had to cut prices in its core UK retail business, in order to match supermarket competition.

The good news is that Majestic does seem to be making progress. Like-for-like sales in the Majestic retail business rose by 7.5% over Christmas. The group’s total sales rose by 12.4% over the 10-week Christmas trading period. This is important, because about 30% of Majestic’s annual sales are generated during the festive season.

Net debt remains low at £25m and the dividend has now been reinstated. Analysts put the stock on a P/E of 27 for 2016/17, falling to a P/E of 19.2 for 2017/18. I’d hold at these levels ahead of June’s final results, but bold buyers may want to add more.

The post Is this battered stock a buy after 62.5% dividend cut? appeared first on The Twelfth Magpie.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The “continued prevalence of larger individual risk and catastrophe losses” has hammered the company’s expected earnings and these losses mean underwriting contribution for the year is likely to be “lower than…prior expectations”. Management is now forecasting an overall combined ratio, a key measure of profit for underwriters, to be within the range of 98% and 100% for 2016 as a whole. A ratio of less than 100% means the insurer is generating a profit from its underwriting activities.

The higher loss ratio also includes a writedown of the firm’s deferred acquisition costs by approximately £17m, and an increased charge for 2016 of approximately £5m.

No surprise 

In many ways, it’s not surprising that shares in Novae have plunged following today’s announcement. Insurance is an inherently risky business with insurance losses sometimes pushing insurers to the brink of bankruptcy. However, despite this risk the market seems to have ignored Novae’s past, pushing the shares up to a high of the back of better than average profitability forecasts. 

The City was expecting the company to report earnings per share of 111.3p this year, up 37% year-on-year. Nonetheless, earnings were expected to fall back to 80.5p next year. Such earnings volatility isn’t unusual for insurer although, Admiral (LSE:ADM) seems to have bucked the trend.

Cracking the code 

Unlike Novae, which ensures against large one-off risks, Admiral writes motor insurance. Motor insurance isn’t as profitable as the Lloyd’s business Novae takes on, but it is somewhat predictable. Admiral has been able to capitalise on this trend by achieving economies of scale, pushing costs down and profits up. This, in turn, has made the group more attractive to customers.

Over the past five years, Novae’s pre-tax income has moved from a loss of £6.3m to a profit of £55.4m reported last year. Over the same period, revenue has grown by 30%.

In comparison, Admiral’s revenue is expected to hit £2.1bn this year, up from £960m in 2011, and earnings per share are slated to come in at 109p this year, up from 82p in 2011. Further, as Admiral’s business is more predictable, with smaller regular losses, the firm can afford to return more capital to investors than Novae, which has to keep a significant amount of capital on its books to protect against one-off shocks. 

As a result, Admiral is a FTSE 100 dividend champion. This year the shares of support a dividend yield of 6.3% and next year analysts have pencilled-in a yield of 6.5%. The company has returned almost 100% of its net income over the past five years to investors.

The bottom line

So overall, today’s profit warning from Novae highlights why insurers are risky investments but not all insurance companies are created equal. Admiral has cracked the insurance code and as a result, the company looks to be a much better investment than its smaller peer.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.