QBE Insurance Group Ltd (ASX: QBE) on Friday closed 0.75% lower at $13.26, 11.5% from it's high for the year of bang on $15 back in May, yet many consider the company among the most expensive insurance stocks on the market.
Could they be wrong?
Stretched Valuation
QBE is currently trading on a trailing price to earnings ratio of around 22.5, well above both the sector average of 16.0 and the 15.3 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 2.8%, compared to 7.0% for Suncorp Group Ltd (ASX: SUN) and 5.8% 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, which have changed wildly over the last two months.
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 collected from the average of analysts the cover the companies (note that QBE's financial year ends on 31st December so the 2015 data is also a forecast):
| Company & Measure | 2015 | 2016 | 2017 |
| IAG EPS | 37.5 | 39 | 40 |
| IAG P/E | 13.3 | 12.8 | 12.5 |
| IAG DPS/Yield | 29/5.8% | 28.5/5.6% | 29.5/5.6% |
| Suncorp EPS | 87.2 | 105 | 107 |
| Suncorp P/E | 14.3 | 11.9 | 11.9 |
| Suncorp DPS/Yield | 76/7.0% | 91/7.2% | 89/7.1% |
| QBE EPS | 68.0 | 78.8 | 85.9 |
| QBE P/E | 19.5 | 16.8 | 15.4 |
| QBE DPS/Yield | 37/2.7% | 50.5/3.8% | 54.5/4.1% |
As you can see, based on analysts' estimates for QBE, it remains the most expensive insurance company even two years out despite its steadily growing earnings per share. An interesting quirk here is that just three months ago QBE's estimates were much higher, while IAG and Suncorp's were lower!
Can we trust predictions?
Investors need to take care when making decisions based on the opinion of sharemarket analysts. As I mentioned a while back, 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."
