FTSE 250 insurance business Esure(LSE: ESUR) is, I believe, one of the best income stocks around today. Indeed, since the company's IPO five years ago, it has returned just under £300m in cash to shareholders, which is around 20% of its market value at the time of the IPO.
And it doesn't look as if the business is going to stop this policy of returning enormous amounts of excess cash to investors anytime soon either.
Looking after investors
Today the company announced its results for the year ended 31 December revealing a 25.2% increase in the value of gross insurance premiums written and a 9.2% jump in the number of insurance policies in-force to 2.4m. This growth helped the firm report a better-than-expected 36% rise in full-year pre-tax profit despite its management issues.
Off the back of this growth, management has decided to pay a final dividend for the year of 13.5p, which is 31% higher than last year when adjusting for the impact Gocompare.com profits had on Esure's earnings. Esure spun off its Gocompare.com price comparison website at the end of 2016.
A full-year dividend of 13.5p means the shares now support a dividend yield of 6%, and it looks as if this market-beating distribution is here to stay. The company is planning to grow the number of in-force insurance policies to three million or 25% by 2020, driving further improvement in probability. The business is well capitalised to chase this growth plan with a solvency ratio of 155% reported at the end of 2017, which is "ahead of its normal operating range" according to management, allowing the firm to "pursue both our current strategy and to position the business for the future."
As the company builds on its success, City analysts are expecting earnings per share to rise 12% next year putting the shares on a forward P/E of 10.7, although following today's results, I would not be surprised if these forecasts are revised higher in the weeks ahead.
Esure is just one cash-rich insurer that has established itself as a dividend champion. Indeed, Hastings Group(LSE: HSTG) has only been a public company for two years, but during this period it has increased its annual dividend to investors by around 50%.
Actually, this is not strictly true. For fiscal 2015, the company paid a dividend of 2.2p, but this was reported only a few weeks after the firm's IPO, so many investors would have missed out. The following year, the distribution jumped to 9.9p and then for 2017, off the back of a 39% jump in operating profit, management announced a dividend of 12.6p per share, and analysts are expecting the distribution to hit 14.7p for 2018. So, if you count Hastings' 2015 payout, the firm's dividend has surged 570% in four years, although if you go off the more established figures between 2016 and 2018, the distribution is up 48%.
Still, whichever numbers you use, the conclusion is the same: Hastings is a dividend growth champion.
Based on the estimated payout of 14.7p for 2018, the shares yield 5.4% rising to 6.4% if the company increases its distribution by a similar amount in 2018. With earnings per share expected to grow by 42% over the next two years to 27p, there's no reason why the group cannot hit this dividend target.
Invest like Warren Buffett
Billionaire Warren Buffett made the bulk of his fortune in the insurance business, and he loves insurance companies like Esure and Hastings that have a record of returning cash to investors and profitable growth.
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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.