QBE Insurance Group Ltd (ASX: QBE) on Friday closed 2.9% lower at $13.80, 7% from its high for the year as the share price again failed to extend meaningfully above the $14 mark.
QBE's share price has see-sawed between $13 and $14 for much of the last four months as investors wait for half-year earnings.
Stretched Valuation
QBE is currently trading on a trailing price to earnings ratio of around 20.1, above the sector average of 18.3 and well above the 16 of the wider market. The question is, should QBE really trade at a premium to the sector seeing as it has a much lower dividend yield?
QBE's trailing yield is a miserable 2.7%, compared to 7.7% for Suncorp Group Ltd (ASX: SUN) and 6.9% for Insurance Australia Group Ltd (ASX: IAG), and investors are rightly questioning whether QBE should trade at a lower price to earnings ratio as a result.
The Most Expensive Insurance Stock
The key difference between the three companies is their respective growth profiles. I prefer to look at earnings per share growth as the most relevant growth measure for individual shareholders. Here are the earnings per share (EPS), dividend per share (DPS), and price to earnings (P/E) forecasts for all three:
| Company & Measure | 2014 (Actual) | 2015 (Est) | 2016 (est) |
| IAG EPS | 59.4 | 40.4 | 39 |
| IAG P/E | 9.5 | 14.0 | 14.5 |
| IAG DPS/Yield | 39/6.9% | 31.8/5.6% | 31.8/5.6% |
| SUN EPS | 102 | 93 | 100 |
| SUN P/E | 13.33 | 14.6 | 13.6 |
| SUN DPS/Yield | 105/7.7% | 86.4/6.4% | 84.6/6.2% |
| QBE EPS | 68.6 | 85.2 | 110.3 |
| QBE P/E | 20.1 | 16.2 | 12.5 |
| QBE DPS/Yield | 37/2.7% | 51.5/3.7% | 62/4.5% |
As you can see, investors in QBE are paying for FUTURE growth, while IAG and Suncorp shareholders are paying for the current dividend yield. Right now, when looking at the trailing price to earnings ratio, QBE is by far the most expensive insurance stock, however looking two years out, QBE becomes the cheapest!
Can we trust predictions?
Investors need to take care when making decisions based on the opinion of sharemarket analysts. As I mentioned last week, there are a number of recent and high-profile cases of analysts getting it wrong and shareholders losing considerable sums of money.
I said at the time that the most important factor to consider is how comfortable YOU are with the company's prospects. "Take your time to assess the risks that a company faces and if that risk is too great then simply don't invest. The worst that can happen is that you'll miss out on some gains, but you'll pass the sleep-at-night test that can cause you trouble when investing in a company you don't really believe in. In addition, there are typically hundreds of companies that perform well over any time period, so hopefully you're investing in a better company instead."
