In the last 10 years, the performance of the ASX has been disappointing. That's because it has risen by just 12%, which works out as an annualised rate of just 1.1%. However, a number of stocks have managed to underperform even such a poor performance, with the likes of AMP Limited (ASX: AMP) and Insurance Australia Group Ltd (ASX: IAG) declining by 23% and 8% respectively during the time period.
A key reason for this has been a fall in net profit during the last 10 years. For example, AMP's bottom line has fallen at an annualised rate of 11.4% during the period, while IAG's net profit has declined by 2.6% per annum during the same time period. And, while the global financial crisis had a negative impact on their financial performance, deteriorating earnings over such a number of years still represents a failure for the two companies' stakeholders.
The past, though, may not prove to be an accurate guide to the future. That's because AMP, for example, is forecast to increase its earnings on a per share basis from $0.29 in financial year 2014 to almost $0.42 in financial year 2016. That's a rise of 45% in just two years and works out as an annualised growth rate of over 20%. Yet, despite this, AMP remains a good value stock and its share price fall in recent years means that it trades on a price to earnings growth (PEG) ratio of just 0.78, which is lower than the ASX's PEG ratio of 1.34.
Similarly, IAG is expected to deliver much improved performance over the next couple of years, with its earnings due to rise from $0.37 last financial year to $0.40 in the next financial year. Although the rise of 8.1% is lower than that of AMP during the same time period, it would still represent an excellent turnaround for the business – especially since it recorded a 33% fall in its net profit last year. And, with IAG trading at a discount to the ASX based on its price to earnings (P/E) ratio of 13.2 (versus 14.8 for the wider index), an upward rerating is on the cards.
Meanwhile, IAG's yield of 5.7% (fully franked) is higher than AMP's yield of 4.8% (partially franked) and also more appealing than the ASX's yield of 4.9%. This gap, though is due to be closed, since AMP's dividends are set to follow rising profitability so as to put the stock on a forward yield (using financial year 2017's forecasts) of 5.6%. And, with IAG's profit growth being much lower than that of AMP, its forward dividend yield stands at 6%, meaning there is set to be just 40 basis points between their yields in a couple of years' time.
Of course, AMP and IAG operate in very different financial sectors. AMP is a wealth manager and so its income is dependent upon the performance of the ASX and, while uncertainty surrounding the Chinese and domestic economies may cause short term turbulence, an accommodative monetary policy and the prospect of improved economic performance in the medium term is likely to equate to improved returns for the wider index down the line.
As a result, and while the Aussie insurance market remains lucrative, AMP appears to be the preferred option at the present time, owing to its superior growth rate and the scope for higher dividends over the medium term.
