The tide has finally turned!
After years of underperformance, QBE Insurance Group Ltd (ASX: QBE) has finally outperformed Insurance Australia Group Ltd (ASX: IAG) over a 12-month period and signs are good for a similar result in 2016.
In 2015, QBE's share price has increased by 19% compared to IAG's 12% decrease, however the direction of their performance going forward has as much to do with their dividend payout as their operational performance.
Insurance company barometer?
The sign of a good and strong insurance company is its ability to pay dividends out to investors. Warren Buffett is an investor in insurance companies because the free cashflow and float is able to be used to reinvest in the company or make additional purchases.
It's not all sunshine and rainbows though, QBE's share price has plummeted over the last five years as the group's operational performance waned and the dividend payout slumped from nearly 130 cents per share in 2011 to just 40 cents in 2014. Conversely, IAG's payout increased from just 22 cents in 2011 to a high of nearly 60 cents in 2014!
2015 Turnaround
When we look at the dividends paid out by IAG and QBE in 2015, we can start to understand why their shares have performed so differently. IAG's payout dropped to just 40 cents, while QBE's increased to over 60 cents! Investors and analysts are now concerned about which direction the payout will go in the future and also which way the company's profit and share price is heading.
Dividend duel- 2016 and beyond
Here's what analysts are thinking:
| Company & Measure | Price | 2016 | 2017 |
| IAG EPS | $5.52 | 38 | 40 |
| IAG P/E | 14.5 | 13.8 | |
| IAG DPS/Yield | 30.5/5.5% | 30.4/5.5% | |
| QBE EPS | $13.35 | 79.4 | 86.9 |
| QBE P/E | 16.8 | 15.4 | |
| QBE DPS/Yield | 49.9/3.7% | 53.5/4.0% |
DPS = dividend per share (in cents)
EPS = earnings per share (in cents)
P/E = price/earnings ratio
The main takeaway from the table above for me, is that while IAG's dividend yield is bigger at the moment, QBE is expected to have some earnings momentum behind it, which could see the share price and dividend payout increase meaningfully over time.
Investors are punishing companies that lack earnings and dividend growth potential, just look at he big four banks, Woolworths and the resources companies.
Investors in IAG risk being caught in the same trap where money moves from IAG's relatively high dividend yield to companies with a better profit growth outlook.
