Insurer and banking company Suncorp Group Ltd (ASX: SUN) has been rising steadily over the past three months, up 5.2% versus the 1.6% gain of the S&P ASX 200 Index (ASX: ^XJO). It is just a few percentage points away from making a new multi-year high, so could the share price rally be drawing to a close?
I believe it has still has more to run. There could be a little sell-off from profit takers, but long-term investors should look past that and hold onto their Suncorp shares, or pick up a little more on a pullback. Here are three reasons why.
— Great yield and dividend growth
Even with a steady stock price rise, the dividend yield is still a wonderful 5.1%. Good portfolio income is always welcome. The company has a reputation of paying special dividends along the way also. The latest was in FY 2013, a 36% addition to the 55 cents per share full year dividend.
It raised the first half-interim dividend by 40% on the previous corresponding period, and has stated there could be further special dividends in the near future.
— Business simplification
By restructuring itself, the company projects that it can produce cost savings of around $265 million by 2016. Part of the savings could flow towards shareholders through higher profit margins and increased earnings per share.
It can also be partially used to make the company more cost competitive against other insurers like Insurance Australia Group Limited (ASX: IAG) or QBE Insurance Group Ltd (ASX: QBE).
— General insurance and banking improving
Revenue and earnings from general insurance, like car and home insurance, have been rising. The banking business, the fifth largest bank after the Big Four, saw first-half earnings improve greatly. The business has been de-risked and keeping a conservative loan book has set it on a financially stronger footing.
The plus here is that with more savings and better earnings, Suncorp said there could be a return of surplus capital to shareholders, which may mean special dividends.
As the general economy improves and the company works on improving its life insurance business, the share price could rise from here. The possible extra dividend income will also attract other yield-seeking investors like DIY Super investors, so holding Suncorp shares now may be a wise move.
