Could you ever love an insurance company? Well, you might become quite fond of a stock that's up about 20.4% since early February, almost four times more than the 5.2% gain of the S&P/ASX 200 Index (INDEXASX: XJO). And the index doesn't even pay a whopping yield like Suncorp Group Ltd (ASX: SUN) does.
But it's not time to ring the cash register if you hold Suncorp stock. There are a number of reasons why you should stick with your shares.
1. Improving outlook
Several years ago, Suncorp and most of the other insurance companies were suffering from a lot of claims from big natural disasters. Fortunately, that doesn't happen every year. Reduced claim levels free up funds that can be used to grow the company or flow through to earnings.
2. Strong dividend income and yield
The stock is yielding 5.9% fully franked, which is more than some of the big four banks are paying. What's more, since FY 2011 dividend payments have gone up about 3 times from 35 cents per share (cps) to 105 cps. A good part of that was from three special dividends on top of a rising full year dividend.
3. Bank is improving as the housing market rises
The banking segment has made a great turnaround over the past year after it cleared a big chunk of its bad loan book that was weighing it down. On the up side, the bank is seeing more residential home loan business due to the growing housing market. Interest rates may be low, but that brings in higher volumes of business, so you can look forward to possibly higher banking earnings over the next 1 – 2 years.
4. Future capital return possible
Suncorp Group has implemented a simplification program to cut back costs and streamline the business. It is forecasting recurring cost savings of $225 million in FY 2015 and $265 million in FY 2016.
The company intends to return surplus capital to shareholders and part of these savings can go towards more special dividends or a possible share buyback.
Suncorp Group has potentially more to offer shareholders over the next 2-3 years as it reorganises itself. For these reasons, it could be a good stock for dividend income.
If you are looking for more dividend stock ideas, then you will probably be interested in knowing about a company our top analyst, Scott Phillips, recently discovered. This cheap but growing ASX stock offers a 6.2% grossed-up dividend yield and could be a buying opportunity now.
The Motley Fool has written a free report on it: "The Motley Fool's Top Dividend Stock for 2014-2015" which it's sharing with all interested investors.
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