Insurance company RSA is in a mess. It has issued two profit warnings this year and admitted that there are some accounting irregularities in its Irish business. After cutting its dividend by a third earlier this year, many analysts now think it will cut it again.
It's no surprise, therefore, that the share price has tanked. With dividends expected to be barely covered by profits, I think a dividend cut is likely.
Investors have bought insurance shares because of the big dividends that they pay. But, as RSA demonstrates, this sector has lots of risks. Competition is fierce, while firms are also under pressure to have stronger finances. Analysts are currently expecting a dividend of 6.25p per share from RSA.
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At 110p per share, that gives a yield of 5.7% before any cut. We've been more positive on the company's irredeemable cumulative preference shares (LSE: RSAB) for a while now as they pay a fixed dividend before ordinary shareholders get a penny, making them less risky.
At 110p (coincidentally) they pay 7.375p per share to give a fixed yield of 6.7% and look a better bet for income.
We continue to prefer specialist insurers such as Amlin (LSE: AML) and Lancashire Holdings (LSE: LRE) for their potential dividend income.
Verdict: avoid
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