2015 has been rather disappointing for investors in Suncorp Group Ltd (ASX: SUN), with the diversified financial company seeing its share price fall by 2% while the ASX is up 3% year-to-date. This is at least partly due to fears surrounding the long term prospects for margins in the insurance industry, which are expected to be squeezed somewhat by increasing competition over the long term.
However, Suncorp still has a bright future as an investment, and now seems to be the perfect time to buy a slice of it for these three reasons.
Valuation
While the wider insurance sector trades at a premium to the ASX, with it having a price to earnings (P/E) ratio of 18.6 versus 16.4 for the wider index, Suncorp still offers a discount despite seeing its share price rise by 63% in the last five years. In fact, Suncorp's P/E ratio is just 14.9 and, looking ahead, the company's growth prospects could act as a clear catalyst to push this significantly higher.
For example, Suncorp is expected to increase earnings per share from $0.57 last year to $1 next year. That's a rise of 75% in just two years and, best of all, the market does not seem to be pricing in such a stunning rate of growth. Evidence of this can be seen in Suncorp's price to earnings growth (PEG) ratio of just 0.46, which is well below the market's PEG ratio of 1.4.
Track record
Of course, such a strong growth rate is not a major surprise, since Suncorp has an excellent track record of bottom line rises. For example, over the last five years it has been able to increase net profit at an annualised rate of 12.9%, which is much higher than that of the wider index.
This should provide investors in Suncorp with considerable confidence in the company's ability to come to terms with a more competitive environment so that, while margins may come under pressure, its highly efficient business model and strategy should allow it to continue to post upbeat earnings numbers – especially if it can deliver on its ambitious cost savings targets.
Defensive appeal
While Suncorp has excellent growth potential, it remains a defensive stock that should be able to ride out market uncertainty better than most of its index rivals. Evidence of this can be seen in Suncorp's beta of 0.87, which indicates that its share price should change by just 0.87% for every 1% movement in the wider index level, thereby creating a less volatile shareholder experience.
Furthermore, Suncorp remains a top dividend stock, as demonstrated by its fully franked yield of 5.9%. That's much higher than the ASX's yield of 4.5% and, looking ahead, Suncorp's impressive growth prospects are expected to allow it to increase dividends per share at an annualised rate of just under 10% during the next two years. Moreover, a positive dividend coverage ratio that is being pencilled in for the current year indicates that Suncorp's dividends are now relatively sustainable.
