3 finance stocks set to post superb returns: Suncorp Group Ltd, QBE Insurance Group Ltd and Commonwealth Bank of Australia

Buying these 3 finance stocks could be a shrewd move: Suncorp Group Ltd (ASX:SUN), QBE Insurance Group Ltd (ASX:QBE) and Commonwealth Bank of Australia (ASX:CBA)

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The performance of finance stocks has been somewhat mixed in 2015. Certainly, banks and wealth management companies have been given a significant boost by the RBA's ultra-loose monetary policy and this could continue.

In fact, demand for new loans is likely to increase and the number of defaults/bad loans could fall if interest rates continue their downward trend, both of which could help banking stocks. And, with the ASX still being within 5% of its eight-year high, the fees from managed funds are also relatively high at the present time, too.

Of course, it could also be argued that the finance sector is somewhat overvalued. For example, the insurance sector has a price to earnings (P/E) ratio of 19.8 versus 17 for the wider index. However, these three finance stocks appear to offer a potent mix of good value and bright futures, which means that they look set to post excellent returns in the long run.

Suncorp Group Ltd

Shares in Suncorp Group Ltd (ASX: SUN) have disappointed thus far this year, being down 4% since the turn of the year versus a 6% rise for the ASX. However, this means that the diversified financial company now trades at a discount to the wider index, with it having a P/E ratio of 15.1.

Furthermore, Suncorp is expected to increase its bottom line at a rapid rate in the current year and in the next financial year. In fact, Suncorp's earnings per share are set to rise from $0.57 last year to almost $1 next year, which would represent an annualised growth rate of 32.5%.

Of course, this is not a major surprise, since Suncorp has posted a rise in earnings of 12.9% per annum during the last five years, which bodes well for its long term outlook and, together with its upbeat forecasts, means that investor sentiment is likely to improve over the medium term.

QBE Insurance Group Ltd

Unlike Suncorp, sector peer, QBE Insurance Group Ltd (ASX: QBE), has soared in 2015, being up around 29% year-to-date. A key reason for this is the success of the company's new strategy to create a business with a more attractive risk/return opportunity for investors, with a crucial component being the sale of non-core assets that required too much capital for the returns being offered.

Looking ahead, QBE has vast potential as an income stock, with its dividends due to rise by 17.2% per annum over the next two years. This puts it on a forward yield of 4.3% and QBE's price to book (P/B) ratio of 1.47 appeals while the wider insurance sector has a P/B of 2.01.

Commonwealth Bank of Australia

With interest rates being so low, Commonwealth Bank of Australia's (ASX: CBA) dividend track record offers vast appeal, with the bank having increased shareholder payouts at an annualised rate of 12% during the last five years. This puts it on a yield of 4.9%, which is considerably higher than the ASX's yield of 4.3%.

Crucially, CBA has a very sustainable dividend. Evidence of this can be seen in the fact that it has a dividend coverage ratio of 1.33 and, with dividends per share set to rise by 4.5% in each of the next two years, CBA also offers an appealing real-terms increase in payouts, too.

Certainly, CBA trades at a premium to the wider banking sector, with it having a P/E ratio of 15.1 versus 13.7 for the banking sector. However, given its significant income potential, it seems to be a price worth paying – as demonstrated by its annualised total return of 25.9% during the last three years.

Motley Fool contributor Peter Stephens has no interest in any company mentioned. 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 Bruce Jackson.

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