Suncorp Group Ltd (ASX: SUN), the $15.6 billion insurer and bank, is making changes in its business to cut cost, improve financial strength and simplify its business model. The whole process may take some time to achieve all the benefits, but we are seeing progress, and that's why investors should be following it now. Here are four reasons to consider buying.
Increased dividend
The interim dividend was raised by 40% from 25 cents per share to 35 cps for H1 2014. Although group net profit fell from $574 million in the pcp to $548 million in the half-year ending December, that interim dividend represented about an 82% payout ratio.
The company plans to have an ordinary dividend payout of 60%-80% of earnings going forward, and still has $252 million of franking credits available after the payment of declared dividends. It also stated that it was committed to returning capital to shareholders that it deemed to be surplus to the company's needs, so there may be other bonuses along the way for investors.
Potential sale of banking segment
The banking segment made up about 22% of total revenue in FY2013, and within that the non-core bank part delivered a big loss due to its "bad bank" of loans, but this has been resolved by offloading this to Goldman Sachs, and taking it off the books. Also, the core bank may now be attractive to investors or other financial institutions should Suncorp be interested in parting with the bank segment altogether. This is at a time when banking stocks are highly valued, so even a premium could be achieved.
Firming up the financial position
The company is holding about $1.2 billion in extra capital above its targeted operations levels, giving its financial position a firm foundation. With insurance, natural disasters or a higher than average volume of claims can occur, so building wide buffers like this is prudent, and gives investors confidence that unforeseen events can be covered more than adequately.
Exit from unfavourable markets
One of the commitments of the company is to raise return on equity (ROE) to over 10%. One of the ways it plans do this is to exit unfavourable markets like its Life Group, Farm Insurance and Aviation, getting back to the core of its general insurance market where margins are better. It had an underlying insurance trading result (ITR) of 14% for the half-year, and with the progress it is making so far, it expects to hit the 10%+ goal in FY2015.
Foolish takeaway
Like many companies, when changes are necessary, they can be a little painful and take time at the beginning, yet in the end they make the business much better in the future. These are the kind of opportunities that investors can take advantage of when the exact change may not be easily quantified, and share price and company value diverge.
