Investors in Telstra Corporation Ltd (ASX: TLS) were sent running for cover last month when the big telco unceremoniously slashed its dividend.
In spite of the many numerous warnings, investors were clearly not expecting the change, or at least, they had not factored it into the company's share price. Telstra shares were punished severely after the announcement and are now down 29% for the year.
So where should Telstra refugees turn? Resources? Index funds? Bitcoins??? Heaven forbid. What about QBE Insurance Group Ltd (ASX: QBE)?
Let's face it, most investors only owned Telstra for the huge dividend and QBE Insurance both pays a dividend and increased its interim dividend by 5% for the first half of the year. At the current share price QBE Insurance offers a dividend yield of 5.4% and it comes partially franked.
An ugly proposition?
I agree that QBE Insurance is potentially an ugly proposition. General insurance is a commodity industry and QBE has no obvious pricing power. The company's recent returns on equity have been, in my view, below average and gross written premiums have fallen steadily over the last five years as the company jettisons underperforming units to improve margins.
On top of all that, it is hardly endearing to be often referred to as a 'consistent disappointer' for investors.
However, as the great Howard Marks would say "everyone knows" all this. And if everyone knows it, to some extent this negativity should be reflected in the company's share price. This means that if QBE is able to deliver improved cash flows and returns for investors, it may not be a crazy proposition for income focused investors.
QBE Insurance makes a lot of its profit simply by investing shareholder and policy-holder funds. This portfolio appears to be relatively conservative with only 1% invested in 'risky' assets like equities and high yield bonds. The structure means a low risk base of earnings and upside potential to total company profit if QBE can sort out the insurance business and improve margins.
Foolish Takeaway
I don't know many people who would call QBE Insurance their "dream" company today. It operates in a cutthroat industry. It has little pricing advantage. It has been retrenching for years and it has built up a reputation for disappointing investors.
However all these points are in plain sight. From a dividend perspective the company has a reasonable earnings base and potential upside if it can avoid major insurance disasters and improve operating margins. I think fleeing Telstra investors could certainly do worse.
