The popularity of high yield stocks such as National Australia Bank Ltd (ASX: NAB), Commonwealth Bank of Australia (ASX: CBA) and Suncorp Group Ltd (ASX: SUN) has increased after the RBA cut interest rates to 1.5%. Suncorp's yield of 5.2% is 100 basis points higher than the ASX's yield and may not be around much longer for these three reasons.
Strategy
Suncorp's strategy is customer-focused and in my view will allow it to develop increased customer loyalty as well as cross-selling opportunities. For example, Suncorp has reorganised itself and restructured to a new operating model which offers customers access to the Suncorp marketplace. This will allow them to self-select solutions, tools and a range of services which are of use to them based on their prior product purchases.
Further, Suncorp will work with third parties to offer its customers access to products such as on-demand insurance for single items. This improves convenience for its customers and marks a distinct move away from the previous approach of selling unrelated and unconnected products to the same customer. This more joined-up approach will improve Suncorp's efficiency and could catalyse its profitability and dividend growth.
Financial strength
Suncorp's common equity tier 1 (CET1) capital stands at 9.2%. This is $346 million above its operating targets, with Suncorp's total risk weighted capital ratio being 13.53%. This provides it with significant financial flexibility and means a dividend payout ratio of 83.8% of net profit after tax is sustainable.
Suncorp's cost-cutting measures also improve dividend growth prospects. For instance, Suncorp's General Insurance segment reduced total operating expenses by 1.9% in financial year 2016, with the operating expense ratio improved to 22% from 22.6% in FY 2015. Similarly, Suncorp Bank's operating expenses fell versus the prior period and its cost:income ratio of 52.5% was achieved in FY 2016 after absorbing ongoing investment into key strategic initiatives.
Sustainability
Suncorp has taken a cautious approach to investment lending. It has limited exposure to higher risk segments such as inner city apartment complexes. This reduces its overall risk profile and could mean that dividends are more sustainable than for many of its ASX peers. Its strong focus on credit quality and risk management meant that Suncorp's gross impaired assets were reduced last year. Impairment losses totalled $16 million, which works out as 0.03% of gross loans. This is less than Suncorp's through-the-cycle expected operating range of 0.1% to 0.2%.
Further, its well-diversified wholesale funding position means that during periods of above average volatility, Suncorp benefits from access to a range of funding instruments in both domestic and international markets.
As such, the long term prospects for Suncorp's dividend are bright. Its combination of a sustainable dividend, sound finances and a strategy which could boost customer loyalty, margins and dividends makes its 5.2% yield appealing.
