Lancashire Holding (LRE.L) – A Hot Pot Yield!

Who’s next in the Lloyds insurance serial takeover saga? First Catlin Insurance (CGL.L) is acquired by US reinsurer XL for over 700p per share, then last week Brit Insurance (BRIT.L) accepts a bid from Canadian insurer Fairfax Financial for over 300p per share (post dividend payment), both handsome premia to the pre-bid share price! 

Clearly the global catastrophe insurance market is consolidating fast, as besides these two acquisitions, there have already been two other deals in the US reinsurance sector (RenaissanceRe buying Platinum Underwriters, and Axis Holding merging with PartnerRe).

1. Catlin and BRIT have been kind to their shareholders

Source: Bigcharts.com

Of the big five listed Lloyds insurers, that leaves only Beazley (BEZ.L), Novae (NVA.L) and Lancashire Holdings (LRE.L). According to Bloomberg, bid speculation is already swirling around both Lancashire and Novae. Of these three, I am focusing on Lancashire as an attractive investment for a number of reasons, including its status as a potential takeover target.

What exactly does Lancashire do?

But first, a little background on this stock: Lancashire Holding is a Lloyds insurer that offers global specialty insurance and reinsurance products, principally in the fields of Property, Energy, Marine and Aviation. Its two main property reinsurance products include retrocession written on either a single territory or worldwide basis, and catastrophe excess of loss. 

3 Reasons to Like Lancashire: Takeover Target, Pumped-Up Profitability, Dishy Dividend

First of all, catastrophe reinsurance (where insurance companies like Aviva pay specialist reinsurance companies like Lancashire) is very profitable - after all, this is why the world’s greatest investor, Warren Buffett, operates in this insurance segment with the General Re subsidiary of his company Berkshire Hathaway. 

The four merger & acquisition deals listed above highlight that this industry is becoming all about economies of scale – i.e. the bigger you are, the more profitable you are as you can demand higher insurance premiums for the risk you take on. In the UK Lloyd’s insurance market, Lancashire, Novae and Beazley all appear to be viable takeover targets.

Impressive Growth Record

Lancashire has posted impressive growth since 2006, underlined by the impressive long-term growth in book value that the company has achieved, a cumulative 375% growth rate over the last 9 years (Figure 2).

2. Impressive Long-Term Growth in Book Value + Dividends Paid

Source: Lancashire Group

Delicious Dividends

At a time when high income investments are becoming increasingly difficult to find, £LRE stands out in the FTSE 350 index with its outstanding 9.1% dividend yield, far ahead of any other UK insurer and indeed, the second-highest dividend yielder out of the entire FTSE 350 index (Figure3).

 

3. One of the Highest Dividend Yields in the FTSE 350

Source: Stockopedia

You might think that such a high dividend yield is unsustainable – but I would argue otherwise, given that it has paid a bumper special dividend in 6 of the last 7 years (2011 the only exception) in addition to the regular dividend.

Recent Results Rate Highly

February 12’s Q4 results were solid, with broker Numis highlighting the $92m pre-tax profit in the quarter beating the consensus $58m expectation by some distance, and Lancashire announcing a 50c special dividend (ex-dividend date: 19 March). This should boost confidence in 2015 forecasts, particularly the 90.6c dividend forecast and the forecast of modest growth in book value.

Cheapest of the Lloyds’ Reinsurers

Finally, Lancashire remains the cheapest of the five listed Lloyds’ insurers, as can be seen from the table below (Figure 4):

4. Lancashire is the cheapest of the Lloyds Insurers

Source: Stockopedia

Don’t Just Take My Word For It, Check Out These other Articles on LRE

I am not the only one to believe that Lancashire is a compelling income story; both noted blogger @chrisoil and also Steve Evans of seekingalpha.com have highlighted the many investment attractions of Lancashire, here, here and here. So by all means check out their well-informed views on Lancashire too!

If you can find a more interesting 9% yielding income stock than Lancashire in the UK market today, then please do let me know! In the meantime, I think that 9% is simply too good to pass up. Get it while you still can!

Edmund

IB Times Article, Video: Barratt, Berkeley and Taylor Wimpey are safe bets for building returns

Please click on the web link below to read the original International Business Times article and watch the short video interview:

Barratt-berkeley-taylor-wimpey-are-safe-bets-building-returns

What should be the investors' mantra in 2015? I would vote for "Income, income, income", given the paltry interest rates on offer from bank and building society savings accounts. You can forget UK gilts (government bonds) as a source of income too, as a 10-year gilt only offers a pre-tax yield of 1.3% per year.

Within UK stocks, one of the most attractive homes for cash is your Isa (don't leave any Isa top-ups to the last minute in April) and any recently liberated private pension savings is in UK house builders such as Barratt Developments (code BDEV), Berkeley Group (BKG) and Taylor Wimpey (TW).

As a group, house builders such as these have enjoyed strong performance in share prices, gaining 20% since June of last year while the FTSE 100 index has struggled to remain flat (Figure 1).

Figure 1. House Builders Leave the FTSE 100 in the Dust

Source: Stockopedia.com

Yes house price inflation is slowing but prices are still rising

Unless you have been living on Mars these past few months, you will most likely be aware that UK house price inflation is slowing, with the Nationwide Building Society reporting a monthly gain in average prices of only 0.3% in January 2015, resulting in a yearly gain of 6.8% and driving the average price of a UK property up to a new all-time high of £188,446 (Figure 2).

Figure 2. House Prices Up 6.8% Over the Last 12 Months to £188,446 Average

Source: Nationwide

There are a number of economic factors that should support house prices over the year ahead, perhaps allowing for modest further house price inflation over 2015:

1. Lower unemployment (latest rate down to 6%) and improving wage growth (+1.6% year-on-year)
2. Lower energy costs on the back of lower petrol prices and lower utilities bills, boosting household discretionary income
3. Lower average mortgage interest rates as banks and building societies become more aggressive in chasing new mortgage and re-mortgaging business, with a two-year fixed rate for a 75% loan-to-value (LTV) mortgages heading down toward a new low of 2% (Figure 3).

Figure 3. UK Average Mortgage Rates Keep Falling 

Source: Bank of England

These economic and house price trends bode well for new build house prices for the remainder of 2015, with the latest Council of Mortgage Lenders' statistics highlighting a surge in first-time buyer mortgage borrowing, a healthy sign for the overall housing market.

Higher house prices herald higher profits

The surge in UK house prices has evidently been a boon for these house builders, with large house-building operations in the hot London and south east regions benefiting from higher prices for new build homes. These price gains have in turn driven higher levels of profitability for this group, reaching a historically elevated average of over 15% in 2014 (as measured by return on equity, Figure 4).

Figure 4. House Builders' Profitability Levels Hit Historic Highs 

Source: Stockopedia.com

Higher profits deliver delicious dividends

The direct result of this growth in house builders' profits is a bumper dividend crop for investors; this is a welcome income stream at a time when yield is becoming increasingly hard to find not only in the UK but indeed around the world.

Expected dividend yields this year range from a relatively lowly 2.6% in the case of Redrow to a very tempting 7.3% offered by Berkeley Group (BKG, Figure 5).

The house-building sector offers an average 5.3% dividend yield, which you can harvest without paying any tax if you buy the shares within a stocks and shares Isa.

Figure 5. House Builders Offer a 5.3% Average Dividend Yield 

Source: Stockopedia.com

All in all, I believe the bumper profits and premium dividend yields on offer from Barratt (BDEV), Berkeley (BKG) and Taylor Wimpey (TW) all merit a closer look for potential inclusion in an Isa or personal pension income portfolio. Why not delve into those delicious dividends?

Ultra-Low Interest Rates Mean Your Cash Could Use a Workout

International Business Times UK Video Interview

IBTimes UK Article: ultra-low-interest-rates-mean-your-cash-could-use-workout

While ultra-low interest rates are a boon for mortgage borrowers, they are a curse for the legions of savers who have seen their cash returns collapse.

Six years into supposed economic recovery after the seismic shock of the global financial crisis, the FTSE 100 index has gained 80% from the 2009 low to the present date.

You might have thought that retail investors would have been enjoying this impressive stock market performance. But in fact, not nearly as much as you might have thought, because according to the OECD, UK households have continued to hold very high levels of cash – some 29% of all their financial assets (excluding housing), in common with retail investors across Europe and Japan (Figure 1).

1: UK Households Still Have 29% of All Financial Assets in Cash 

Source: OECD, National Accounts at a Glance, 2014

Clearly, the scars of the last two bear markets in 2000 and 2008 still run deep. But instant-access cash savings rates have never been as low as they are today in post-war Britain: in fact, they have been on a steady decline really since the height of the last property boom in 1990, falling from a heady 13.6% to 1.25% on average today (Figure 2).

 2: Cash Savings Rates Have Not Been This Low in Post-War Britain

Source: swanlowpark.co.uk

It is obvious that a 1.25% interest rate is not enough to preserve the value of your savings in real terms even when shielded from tax in a cash NISA, when average UK inflation has run at 1.8% on the CPI measure this year, and an even worse 2.5% on the old RPI measure.

If you insist in keeping some of your savings in cash, then I can recommend hunting out Regular Saver bank accounts at HSBC, First Direct, Lloyds Bank and Nationwide which all pay up to 6% p.a. on regular savings of up to £250 per month. Attractive interest rates to be sure, but only available on relatively limited amounts.

Attractive Income from the Stock Market

A second route to higher income is through the stock market, where dividend payments have in general been growing consistently since 2009. UK households are relatively under-invested in shares at 10% of total financial assets, compared to other developed countries (Figure 3).

 3: UK Investors' Exposure to Shares is Below Average

Source: OECD, National Accounts at a Glance, 2014

To identify potentially attractive income stocks, I have used Stockopedia's excellent stock screening service to identify UK large-cap companies that offer:

• an attractive combination of good value and quality (based on a combination of different valuation, profitability and risk measures), as represented by the Stockopedia Quality Value Rank (scored out of a maximum 100), and
• a high dividend yield (paid half-yearly or quarterly) of well over 5%.

I have picked out five different UK companies which come out at the top of this ranking from a range of different industries, including house building, insurance and oil & gas (Figure 4):

4: Five UK Large-Cap Stocks With High Yields and High Quality + Value Scores

Source: www.stockopedia.co.uk

The Benefits of Dividend Yield Plus Growth

A portfolio containing equal amounts of each of these five stocks would yield well over 5% and would also participate in any stock market advance. Remember in addition that company dividends tend to grow over time, potentially giving the income investor an even higher yield on initial investment over time.

Alternatively, if you just want to buy a single fund to benefit from this combination of high dividend yield plus future dividend growth, you could invest in the SPDR S&P UK Dividend Aristocrats exchange-traded fund (LSE code: UKDV), which invests in a diversified portfolio of higher-dividend yielding UK stocks. To qualify for inclusion in this fund, a UK stock must offer a high dividend yield and must also have grown its dividend consistently over the past 10 years. The current dividend yield on this fund is over 4%, with an annual management charge of only 0.30%.

Both of these investment solutions will give you a far better annual yield on your savings, and should see that yield rise over time too as dividend payments grow – a good alternative to leaving your money in low-yielding cash!

Stock Markets May Be Tumbling But Do Not Join the Rush to Make a Hasty Exit

When you work in financial markets, as I do, it is easy to sense the pervading air of panic as stock markets tumble.

Newspapers and websites broadcast sensationalist headlines such as "Countdown to Panic Grips World Markets" and 24-hour news and business TV channels report on a minute-by-minute basis on the immediate loss of paper wealth that the world's investors are suffering – "£46bn lost on the FTSE 100 today".

Luckily, I have a little experience to fall back on, as I have worked in financial markets for the last 20 years now – and have the grey hairs to show for it. What this experience, and a cursory scan of financial market history, tells me is that we now seem to be heading into an overshoot mode.

To read the rest of this article on International Business Times,
please click on this web link:

Stock-markets-may-be-tumbling-do-not-join-rush-make-hasty-exit

Edmund

CNBC Europe Guest Host appearance: On the Importance of Dividends...

This morning's TV appearance on CNBC Europe's Squawkbox programme was a good laugh, as anchor Steve Sedgwick is very jolly and combative, a good combination!

Here is a short video segment with me discussing UK dividends with a chap from Markit:

CNBC Europe video on Dividends

2014: Walking the Yield Tightrope

A Happy New Year to you!

Looking in the rear-view mirror, 2013 was perhaps surprisingly a very good year for investors willing to take on financial risk in the face of an uncertain macroeconomic climate. Despite the complete lack of growth in the Euro area, question marks over the sustainability of growth in previously fast-growing emerging economic powerhouses such as China and India, and the twin headwinds of a government shutdown and higher taxes Stateside, developed stock markets delivered frankly impressive returns as did a number of other asset classes such as high-yield corporate bonds and residential property.

But as we set foot on the investment path anew in 2014, in what direction should we be heading? Will 2013’s financial market trends be repeated this year, or should we be changing course?

2014 Trend number 1: Still Hunting for Yield

Please click on the web link below to my Mindful Money mini-site to continue reading this article...

2014: Walking the Yield Tightrope

Best wishes for 2014! 

Edmund

Dividend funds: caveat emptor!

Market Indicators Remain Positive

With the US S&P 500 stock index hitting new highs, we might ask ourselves if shares are finally starting to become expensive, and vulnerable to a near-term correction. Checking a number of my favourite market indicators, conditions look to remain favourable for stocks and shares. 

1. US advance-decline indicator hits new highs

The cumulative advance-decline indicator, that measures how many stocks have gone up versus those that have gone down each day and adds the up-down balance up over time, continues to make new highs. This points to good market breadth, i.e. that the market is being driven by a large number of stocks rising. If this were not to reflect a similar pattern to that for the benchmark stock indices, then I would be concerned. But no worries here...

US Advance-Decline Index Remains very Bullish

 2. US Value Line Geometric Index Also Very Strong

A second measure of market breadth is the Value Line index, which looks at the performance of the average stock in the US. Again, if this were not to be making new highs at the same time as the benchmark stock indices, I would be concerned. But once again, things look good...

US Value Line Index Also In A Bull Trend

3. European Industrial, Bank Stocks Still Performing Well

In an economic recovery scenario, both industrial and financial stocks should perform well, reflecting the benefit of a stronger underlying economy for profits in both these cyclical sectors. Looking below, we can see that European Industrial (SXNP) and Bank (SX7P) sectors are still in strong uptrends, and close to new highs. 

European Industrials, Banks Close to New Highs

But High Quality Dividend Stocks Now Expensive In the US

Interestingly, stable dividend stocks have in particular started to become expensive as investors have looked for yields outside of the traditional bonds and cash sources, given the very low rates of interest currently on offer from both asset classes. 

US Dividend Aristocrat Dividend Yield at record low

The chart above represents the US dividend aristocrat ETF, which only holds US large-cap companies that have raised their annual dividend consistently each year over the last 25+ years. Members include healthcare companies like Johnson & Johnson, and consumer staple companies like Coca-Cola.  All very high quality companies, but now increasingly expensive, only offering a 1.8% dividend yield now as opposed to nearly 2.5% at mid-year. Clearly investors are looking for a better yield than they can get on bonds or cash, but without taking big risks and thus preferring to invest in companies that offer relative stability. 

Focus more on Small-Cap stocks

October has been a pretty good month for Small-Cap stocks, with both UK and US small-cap indices continuing to outperform the large-cap benchmarks and rising in a strong, steady pattern. Both small-cap indices have gained nearly 5% over the last month, continuing to forge new all-time highs. 

UK, US Small-Cap Indices In Steady Uptrend

Favour Industrials, Small-caps; Beware Overvalued Dividends

I remain a big fan of ETFs exposed to small-cap stocks such as the iShares MSCI UK Small-Cap ETF (CUKS) and the iShares S&P Small-Cap 600 ETF (ISP6). You could get exposure to Small-Cap stocks in Europe overall via the db x-trackers MSCI Europe Small-Cap ETF (XXSC). With capital expenditure trends improving, European Industrials also remain a good area for investment at this moment: db x-trackers STOXX 600 Industrial Goods ETF (XSNR). 

But I would be wary of continuing to chase large-cap dividend stocks and indices higher at this point, as many of these stable growth stocks are now sitting at relatively expensive valuations, particularly in the US.  

If you want to buy exposure to European dividends, it would perhaps be better to look at a high-yielding sector ETF that is performing well, such as the STOXX Europe Telecoms ETF (offered by db x-trackers, Lyxor amongst others) rather than chasing what seems to me to be expensive dividend growth, at this point.