2015 has been a disappointing year for investors in both Suncorp Group Ltd (ASX: SUN) and Insurance Australia Group Ltd (ASX: IAG). That's because their respective share prices have fallen by 2% and 10% since the turn of the year, while the ASX is up 1% in the same time period.
Looking ahead, though, the two insurance sector stocks could see their share prices diverge to an even greater extent, with Suncorp seemingly having the greater potential as an investment. A key reason for that is its stunning growth forecasts over the next couple of years, with its bottom line expected to grow earnings from $0.57 on a per share basis in financial year 2014 to around $1 per share in financial year 2016.
That equates to an annualised growth rate of 32% and, despite this, Suncorp trades on a price to earnings (P/E) ratio of just 14.7, which is less than the ASX's P/E ratio of 15.6. In fact, when Suncorp's growth rate and rating are combined, it puts the company's shares on a price to earnings growth (PEG) ratio of only 0.45, which indicates that growth is on offer at a reasonable price.
In comparison, IAG's bottom line is set to disappoint over the next couple of years, with it due to fall from earning $0.56 per share in the most recent financial year to $0.40 this year. And, looking ahead to next year, it is set to flat line and, as a result, IAG seems to lack a clear catalyst in terms of earnings growth to push its share price higher.
Of course, IAG is cheaper than Suncorp, with it having a P/E ratio of just 13.9. However, a falling bottom line means that dividends are set to be cut, so that IAG's current yield of 6.3% may be trimmed over the medium term. This compares unfavourably to Suncorp which, while having a lower yield than IAG at the present time of 5.9%, is forecast to increase dividends by 10% per annum during the next two years.
Looking ahead, the insurance market in Australia is set to become increasingly competitive, with margins expected to come under pressure due to a greater number of operators in the space. However, both Suncorp and IAG's valuations appear to take this into account, with them offering generous margins of safety, good value for money and great yields. Furthermore, IAG's share price has the potential to rise as a result of improving sentiment following Warren Buffett's decision to buy a 3.2% stake in the business.
However, while IAG does have potential, Suncorp appears to have a clearer catalyst to push its share price higher. Certainly, it has also disappointed thus far in 2015, but with such a strong earnings growth outlook and upbeat dividend growth potential, it is likely to more readily appeal to investors than its insurance sector peer. As such, and while they are both stocks with bright long term futures, Suncorp seems to be the preferred option at the present time.
