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One business good, three businesses bad?

Last week, Suncorp (ASX: SUN) reported a net profit after tax of $724m accompanied by cash earnings of $819m. The company said that the group’s 60% increase in profit “… has been  achieved against a backdrop of a subdued domestic economy, volatile investment markets and another year of adverse weather experience.”

Directors announced a final dividend of $0.20 and a special dividend of $0.15 taking the annual dividend to $0.55 compared to last year’s $0.35.

Suncorp is one of Australia’s largest general insurers with brands such as AAMI and GIO. General insurance contributed $493m of the group’s profits despite a sequence of natural disasters including a hailstorm in Melbourne and widespread flooding in Queensland and Northern New South Wales. Claims in this category were $278m above estimates but, to put this in context, Suncorp has gross written premiums coming in at a fraction under $8 billion and net incurred claims of about $5.4 billion.

The insurance business is combined with a Queensland based regional bank and a life assurance/wealth management business. Following the GFC, Suncorp split the bank into core/non-core components where the non-core business holds lots of older assets and possible bad loans that are gradually being written down This resulted in a non-core $263m loss while the overall bank result was a small profit of $29m. It is worth noting that the outstanding non-core loans represent less than 10% of the total loan portfolio of over $49 billion.

The combination business has not proved popular with investors and there has been talk over the past few years that the banking component might be sold to one of the majors such as Westpac (ASX: WBC) or combined with another regional bank such as Bendigo and Adelaide Bank Ltd (ASX: BEN).

Return on equity is a key driver of value and this is a low 5.1% for the group. While the share price has been on a run in the last few months to a high of $9.25 before going ex-dividend, this is a far cry from the $18 plus share price from 2005 to 2008.

Suncorp’s chief executive, Patrick Snowball, has overseen a tough transformation program over the past three years and the group is certainly looking in better shape now but still faces risks including lower bond yields and lower investment earnings. The  management view of likely developments does not seem to envisage divestments and focuses on business simplification with investments in modern IT platforms, cost controls, capital controls and growth in all three businesses while “…continuing the run-off of the non-core banking portfolio.”

Foolish takeaway

If you want to invest in a general insurer, you might consider QBE Insurance (ASX: QBE) or IAG (ASX: IAG). Interested in banks then how about Commonwealth (ASX: CBA) or Westpac (ASX: WBC)? How about a wealth manager such as AMP (ASX: AMP)?

Suncorp has grown dividends and increased the dividend payout ratio. It has grown revenue and maintained or improved margins. While it still remains a bit of a mixed bag and really needs to improve return on equity, it might be time to re-assess this group’s attractiveness if the share price falls back a bit.

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Motley Fool contributor Tony Reardon owns shares in AMP, Commonwealth Bank and IAG. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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