Insurance, banking and superannuation business Suncorp Group Ltd (ASX: SUN) has risen more than 12% over the past year and looks the kind of business that might attract the attention of legendary investor Warren Buffett. Here are five reasons why.
- Warren Buffett loves investing in strong insurance businesses himself. Buffet himself has built much of his fortune by recognising the brilliant profit-making potential of well run insurance businesses. Suncorp's dominant position means it's Australia's largest insurer by gross written and is the business behind brands like GIO, AAMI and Apia. This scale gives it a competitive advantage and brand power meaning it's positioned for long-term success and unlikely to ever be squeezed out of its core insurance and banking markets.
- Greater profits to be realised through cost cutting. Suncorp is planning simplification benefits of $225 million in the 2015 financial year and $265 million in the 2016 financial year. The group has undergone some major restructuring and cost efficiencies equal better profits and higher returns to shareholders.
- Greater profits to be realised through better margins. Rival business Insurance Australia Group Limited (ASX: IAG) recently announced better-than-expected results thanks in part to mild weather conditions and fewer natural disasters contributing to a lower claims frequency. This is an effect that could also be expected to filter through to Suncorp's full-year results as well.
- The attractive fully franked dividend. This is what makes Suncorp appealing to many investors and with analysts' forecasts for dividends per share of 85.2 cents for 2015, it sells on a forward yield of 6.16% at today's prices.
- The valuation is reasonable given the growth outlook. Based on analysts' estimates for earnings per share of 117 cents in financial-year 2015 Suncorp trades on a forward price-earnings of just 11.8. That looks the kind of decent value that might interest Warren Buffett himself.
