Yesterday insurance company and banker Suncorp Group Ltd (ASX: SUN) broke through $14 a share for the first time since May 2008. Setting a new multi-year high at $14.10, the stock has now risen about 76% in the past two years. It has easily beaten the 35% gain of the S&P/ASX 200 Index (ASX: ^XJO) over the same period.
But is the party over? Should shareholders cash in their chips and start looking for the next promising stock? I don't think so. The beauty of long-term investing is not flipping in and out of the market. It is letting those dividends accumulate and the share price grow over 5-10 years and having even more to celebrate later.
Here are some reasons why you should stick with your Suncorp shares.
1) Better insurance margins
Just today its competitor Insurance Australia Group Limited (ASX: IAG) announced it expects its insurance margins to be higher because there have been fewer natural disaster related claims recently. More temperate weather is keeping claims well below value provisions. On average, Suncorp should benefit from this occurrence as well, so that could mean lower costs and higher earnings later on.
2) Business simplification to generate savings
The company has projected its current business simplification program will reap cost savings of about $265 million by 2016. Seeing that its FY 2013 annual net profit was about $419 million, the savings are quite significant. Possibly some of the savings may flow onto earnings and dividends.
3) Cloud computing for business systems
Suncorp is transitioning to cloud computing for its business platforms, which can drive key performance and improve margins. Like the Big Four banks, Suncorp, the fifth largest bank, can keep a technological edge on competitors who may still rely on older systems.
4) Special dividends and capital returns
The three reasons above lead to the fourth reason to keep your Suncorp shares. The company has accumulated about $1.2 billion in extra capital to strengthen its balance sheet. If by the better margins, lower costs and better systems, it requires less capital than provided for, the company has stated it intends to return surplus capital to shareholders.
This could be by special dividends, which it has a good history of paying. Possibly it could be by an increase in its regular dividends (that already offer a 5.1% yield fully franked) as well. Patient shareholders will find out.
