Diversified Insurer Insurance Australia Group Ltd (ASX: IAG) is currently sporting a 6.4% fully franked trailing dividend – but can the company continue to deliver?
IAG provides general insurance across Australia, New Zealand, Thailand and Vietnam, through several well-known brands including NRMA Insurance, CGU, SGIO, SGIC, Swann, WFI and Lumley Insurance. The company has also forme3d joint ventures in Malaysia, India and China.
Clearly, analysts don't think so, with consensus forecasts predicting earnings of 45 cents per share this financial year, and dividends of 36 cents, down 3 cents from the previous financial year. Even direr are the predictions for dividends in 2016 and 2017 – 37.2 cents each year, hardly more than the 36 cents next year.
They may well be right, as IAG has posted just 4.4% annual growth in dividends over the past decade – as earnings have grown very slowly – just 2.2%. In the last half, IAG delivered a net profit of $579 million, which sounds great, until you realise that was 10% lower than the previous year. What's more, the company left its dividend at 13 cents for the half year – although the payout ratio of 46.6% was below IAG's target band of between 50% and 70%.
The company did state that it faces an "increasingly competitive environment", and a string of weather-related claims impacted the insurer's results.
Still, the company says that it expects to see very strong growth in gross written premium (GWP) of around 17% and a reported insurance margin of between 13.5% and 15.5%. As a result, the final dividend could pleasantly surprise investors.
As the market leader in the personal insurance market in Australia and New Zealand, competitors including AMP Limited (ASX: AMP), QBE Insurance Group Ltd (ASX: QBE) and Suncorp Group Ltd (ASX: SUN) are coming after IAG. If the insurer can fend them off, it's possible the current dividend yield could be maintained. Income investors may want to add IAG to their watchlist.
