Results: Why I'm avoiding Insurance Australia Group Ltd (ASX:IAG) shares for now

The Insurance Australia Group Ltd (ASX:IAG) share price fell 8% to $7.59 this morning after releasing its full year results.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Insurance Australia Group Ltd (ASX: IAG) share price fell 8% to $7.59 this morning after releasing its full year results. Revenue rose 2.6% to $16,411 million and net profit from continuing operations rose 1% to $947 million.

Statutory profit after tax fell 0.6% to $923 million, owing to some one-off costs associated with the closure of discontinued operations.

IAG reported fully-franked full year dividends of 34 cents per share, or approximately a 4.5% dividend yield at a share price of $7.60. Earnings per share were essentially flat at 39.06 cents per share, up from 39.03 cents per share last year.

IAG reported it had net tangible assets (NTA, or "book value") of $1.47 per share.

One interesting factoid that will stand out to investors is that the Royal Commission cost IAG approximately $10 million dollars.

IAG also absorbed around a $290 million reduction in gross written premium (GWP; a measure of insurance sold) owing to some CTP insurance reforms, a discontinued motorcycle insurance business, and adverse foreign exchange rate movements in New Zealand.

IAG also intends to return approximately 25 cents to shareholders later this year or early next year, comprising of a 19.5 cents per share capital return and a 5.5 cents per share special dividend.

This is subject to shareholder approval at the annual general meeting (AGM) in November. The capital reduction is due to IAG's quota share arrangement with Berkshire Hathaway, which effectively reduces the amount of capital that IAG needs to hold.

One notable change during the year is IAG announcing its intention to sell its businesses in Thailand, Indonesia, and Vietnam. This is an interesting decision given that the Asian businesses have, in the past, been touted as a source of growth for the company. It appears that IAG will retain its businesses and joint ventures in India, Malaysia, and Singapore.

The full year outlook for financial year 2019 is somewhat more rosy:

However the insurance market remains competitive and in previous years IAG has walked its guidance back due to pressures that emerged. In my opinion the forecast growth, even if it fell short, is not substantial enough to make a significant near term difference to the value of IAG shares.

QBE Insurance Group Ltd (ASX: QBE) will be expected to report its annual results later this month also (tomorrow, I believe), and it will be interesting to compare the different outlooks for the businesses. We'll have full coverage of QBE for you then.

Back on IAG, in my opinion, it's hard to escape the feeling that IAG's ongoing financial tinkering is a tacit admission that the company is not sure how to grow the business further.

By selling businesses, quota-sharing with Berkshire Hathaway, and returning capital to shareholders, IAG is essentially shrinking its business slightly and engineering its way to higher margins and a higher return on equity.

There's nothing wrong with that, but the fact that this is where the company is concentrating its effort says to me that the business will likely struggle to grow at more than a couple of percent per annum. That means that, as a mature business with limited growth expectations, the price investors pay for IAG is very important. If you overpay, you will receive lower returns over a long term holding period.

In my opinion, given that IAG pays out most of its profit as dividends, I would want to receive around a 6% dividend to compensate me for owning IAG, given that the business will not be likely to grow much.

The current dividend yield of around 4.5% suggests that the company is fully priced (and is possibly due to investors bidding up shares to receive the capital return later this year). As a result I would be inclined to wait for a dip before buying shares in Insurance Australia Group.

Motley Fool contributor Sean O'Neill has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Insurance Australia Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Fallers

Person with thumbs down and a red sad face poster covering the face.
Share Fallers

The worst 3 ASX 200 stocks to buy and hold in October unmasked

You would have done well to avoid these three ASX 200 stocks in October.

Read more »

A man sits in despair at his computer with his hands either side of his head, staring into the screen with a pained and anguished look on his face, in a home office setting.
Share Fallers

Why AFT, Amcor, Corporate Travel, and Macquarie shares are falling today

These shares are ending the week in the red. But why?

Read more »

A male investor wearing a blue shirt looks off to the side with a miffed look on his face as the share price declines.
Share Fallers

Why AGL, Imugene, Star, and Woolworths shares are dropping today

These shares are dropping on Thursday. Let's see why investors are selling them.

Read more »

A young man punches the air in delight as he reacts to great news on his mobile phone.
Share Fallers

Why Corporate Travel Management, JB Hi-Fi, Mineral Resources, and Syrah shares are rising

These shares are having a strong session. Why are investors buying their shares?

Read more »

A guys points his fingers down.
Share Fallers

Why Brainchip, Cettire, Star, and Woolworths shares are being sold off today

These shares are having a difficult time on hump day. But why?

Read more »

Three guys in shirts and ties give the thumbs down.
Share Fallers

Why Black Cat, BlueScope, Cettire, and Coronado shares are falling today

These shares are missing out on the good times on Tuesday. But why?

Read more »

a business man in a suit holds his hand over his eyes as he bows his head in a defeated post suggesting regret and remorse.
Share Fallers

Why Adriatic Metals, Metcash, Paladin Energy, and Westgold shares are tumbling today

These shares are starting the week in the red. But why?

Read more »

A young woman holds an open book over her head with a round mouthed expression as if to say oops as she looks at her computer screen in a home office setting with a plant on the desk and shelves of books in the background.
Share Fallers

Down 36% in 3 weeks, why is the Mineral Resources share price getting hammered again on Friday?

ASX investors are bidding down Mineral Resources shares again on Friday.

Read more »