Investors looking for reliable dividends are often attracted to insurers, as a result of those businesses' reliable earning streams and portfolios of income-earning shares and bonds.
Traditionally, Insurance Australia Group Ltd (ASX: IAG) has been a favourite among dividend investors. However, the recent launch of household name Medibank Private Ltd (ASX: MPL) saw a significant number of household investors buy in as a result of its market dominance and brand power.
Indeed for some investors, Medibank Private was their first ever purchase – but which is the better bet, Insurance Australia Group, or Medibank Private? Here's what I think:
Medibank Private Ltd – yields 3.2%, fully franked
Pros:
- Revenue rises over time as a result of government increases to insurer premiums
- Potential to further reduce claim expenses, lifting profits and potential dividend payouts
- Large enough to negotiate (read: demand) more favourable terms with service providers like hospitals
Cons:
- Experienced CEO departing after many years of service, must find replacement
- Stiff competition, recent underinvestment in brand saw loss of market share to competitors
- Pricing of health insurance reportedly becoming critical; individuals reducing cover
Insurance Australia Group Ltd – yields 5.5%, fully franked
Pros:
- Great, robust dividend
- Some overseas revenues from NZ (20%) and Asia (3%)
- Warren Buffett is significant shareholder
Cons:
- Highly competitive industry
- Headwinds in form of weakening housing market + domestic economy, which could hurt premiums
- Profit and risk-sharing arrangement with Berkshire Hathaway (Warren Buffett) subsidiary company
While both IAG and Medibank operate in very competitive industries, I would tend to lean towards Medibank as my first pick. Even accounting for a potential dividend increase after Medibank's recent profit upgrade, I believe IAG's dividend is likely to remain higher than Medibank's over the next few reporting periods.
However, I believe IAG faces more severe headwinds from a weakening house insurance market, and also has the additional uncertainty regarding the advent of driverless and/or smarter vehicles over the next decade or so (IAG earned 30% of its revenue from Motor insurance in 2015).
On a forward basis, Medibank and Insurance Australia Group look to trade on a similar Price to Earnings (P/E) ratio as each other.
As a result of all these factors, if I had to pick one company, I would prefer to buy Medibank over Insurance Australia Group today.
