Why Neil Woodford could be right to avoid these FTSE 250 dividend stocks

Hastings Direct
Hastings Direct

Investing successfully isn't just about picking winners. It's just as important to avoid losing stocks, as these can crush your portfolio's profits.

Today I'm going to look at two successful UK dividend stocks. Both have been shunned by one of the UK's most high-profile fund managers, Neil Woodford. Is he right to avoid these businesses?

Another impressive quarter

Motor insurance firm Hastings Group (LSE: HSTG) has been one of the most successful flotations in recent years, reporting eight successive quarters of growth since its IPO. The shares have also doubled in that time.

Today's third-quarter update suggests that momentum remains strong. Hastings had 2.6m live customer policies at the end of September, a 14% increase on the same time last year.

Despite this aggressive expansion, the firm doesn't seem to have sacrificed any pricing power. Gross written premiums rose by 25% to £714m during the first nine months of 2017, compared to the same period last year.

Too good to be true?

How can Hastings grow so rapidly during a period when some rivals have delivered much flatter performances? The company's financial strength and profitability seem very similar to rivals such as Direct Line Insurance Group. I don't know enough about insurance to dig very deeply into the group's business model, so I can't answer this question.

What I can say is that the shares still seem reasonably priced. Hastings' stock trades on a 2017 forecast P/E of 15, with a prospective yield of 4%. Forecast earnings growth of 16% in 2018 means that these figures improve to a P/E of 12.9 and a yield of 4.6% next year.

I plan to continue holding my shares, but I'm unsure about buying more.

I'm with Woodford on this one

At the end of September, Neil Woodford's high-yield Income Focus Fund owned shares of no fewer than seven UK housebuilding stocks. So why is he avoiding one of the UK's most profitable businesses in the sector, Berkeley Group Holdings (LSE: BKG)?

One reason may be that Berkeley's focus on high-end London housing means it's particularly exposed to the current slowdown in the capital.

A second reason might be that just one month ago, Berkeley's two most senior directors sold £44m of their families' holdings in the firm. Although founder Tony Pidgley and chief executive Rob Perrins still have hefty shareholdings, I see such a big sale as a sign that the good times could be coming to an end.

That's certainly my reading of Berkeley's trading commentary this year. The group had forward sales totalling £2.74bn at the end of April, and estimated future gross profits from its land bank of £6.4bn.

However, the company's trading statement in September suggested to me that it's scaling back new projects, and focusing on converting some of its book value into cash.

The recent use of share buybacks is also a warning flag, in my view. With the stock at record highs, buybacks don't necessarily offer good value. But they do help to support EPS, and the share price.

Berkeley's earnings per share is expected to fall by around 28% next year. I'm not sure that the promise of a 5% yield is enough to make them a buy, so I'll be staying away for now.

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Roland Head owns shares of Hastings Group. 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.