Australia's fifth largest financial services group, Suncorp Group Ltd (ASX: SUN), gave income-hungry investors what they were looking for with a 40 cent final dividend and 30 cent special dividend when announcing its full year results this morning. The total full year payout puts Suncorp on a 7.5% yield when selling for $14 a share, a yield around double that available from cash equivalents like term deposits in today's low cash rate environment.
It's no wonder investors bid the shares up this morning as Suncorp lived up to its reputation as a reliable income stock with an improving outlook based on a more efficient business model.
The group's core general insurance business benefited from benign weather conditions contributing to lower-than-expected natural hazard claims. Net profit was up 14.4% on the prior year and notably the total loss ratio was 67.8% in FY 2014, compared to 77.1% in FY 2009. The loss ratio reflects total losses paid out in claims versus what is collected in premiums earned. So Suncorp paid out $67.80 for every $100 earned in premiums.
The difference between premium earned and losses paid out is the float which every insurer is able to invest itself to maximise returns. For that reason low cash rate environments do not benefit insurers looking to invest for greater returns. This is one reason why Suncorp and QBE Insurance Group Ltd (ASX: QBE) have struggled to generate decent returns in recent times. However, with an outlook for better investment returns over a five-year time horizon, investors may start to bid up the prices of big insurers.
Suncorp Bank recorded a net profit of $228 million on a net interest margin of 1.72%. The bank's core challenge is to make more on what it lends than it pays on what it borrows and a skinny net interest margin of 1.72% in that regard leaves plenty of room for improvement in profit going forward.
Given its outlook and evidence the turnaround story is taking effect, in my opinion Suncorp remains one of the best stocks available for income-seeking investors.
