The share price performance of diversified financials company Suncorp Group Ltd (ASX: SUN) has been very disappointing since the turn of the year. Its shares have fallen by 9%, which is much worse than the 2% fall in the ASX during the same time period.
However, buying a slice of Suncorp right now could lead to significantly higher total returns than for the wider index. Here are three reasons why.
Business model
As Suncorp's most recent results show, it is making encouraging progress when it comes to its operations. For example, it is focused on a simplification and optimisation programme which is due to deliver around $170m in savings by financial year 2018, with the company set to invest $75m in improving its operating systems in order to make its claims handling process more efficient and more cost effective in the long run.
This should allow Suncorp to meet its target of delivering a return on equity of at least 10% over the medium to long term, with a vertical integration strategy within the general insurance division also likely to aid margins moving forward. In addition, Suncorp's life insurance division is aiming to take advantage of a dislocated industry structure through leveraging its Acclaim IFA program and focusing on the sale of direct products. Overall, this should allow Suncorp's underlying insurance trading result to remain above its 12% target. And, with improved business intelligence within its banking division, it should be able to better cross-sell higher margin products to existing customers, too.
Income
With interest rates likely to fall further as the Australian economy continues to disappoint, Suncorp's fully franked yield of 6.5% has huge appeal. Crucially, Suncorp is committed to maintaining a dividend payout ratio of between 60% and 80% moving forward and is aiming to return any excess capital to shareholders.
This means that the company's dividends per share are expected to rise by almost 18% in the current financial year, which puts the company's shares on a forward yield of over 7%. And, with dividends per share rising at an annualised rate of 16.8% during the last five years, Suncorp has a strong track record of growing shareholder payouts which should provide its investors with confidence regarding future increases in dividends.
Valuation
Looking ahead to Suncorp's growth prospects, it is forecast to increase its bottom line at an annualised rate of 10% during the next two years. Despite this, it trades at a discount to the ASX, with it having a price to earnings (P/E) ratio of 13.9 versus 15.8 for the wider index. And, with Suncorp having a price to book value (P/B) ratio of 1.21 versus 1.84 for the wider insurance sector, it seems to offer considerable upward rerating potential over the medium term.
