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Sale of Suncorp’s ‘bad bank’ could be imminent

Just last month at Suncorp’s (ASX: SUN) quarterly results release, market commentators were calling for management to off-load the underperforming ‘bad bank’ division as we reported here. It appears it hasn’t taken long for management to agree that a sale would be in the interest of shareholders, with The Australian Financial Review (AFR) reporting sources saying: “We’re getting to the point where we may be close to completing that run-off in the next little while.”

The sale of underperforming assets housed within the non-core ‘bad bank’ would release significant funds, possibly allowing the company to pay a special dividend to shareholders. Given that shareholders received a 15 cent per share special dividend in October 2012, a further return will be extra pleasing, particularly given the current yield excluding the special dividend is at the low end for the banking sector at 3.5%. The AFR report certainly got the market excited with the shares up 3.3% in early trade on Monday compared with the ‘Big Four’, including Commonwealth Bank of Australia (ASX: CBA) and National Australia Bank (ASX: NAB) which were up just over 1%.

While Suncorp’s dividend yield when compared with the major banks is on the low end, it is comparable with its listed insurance peers including Insurance Australia Group (ASX: IAG) which is yielding nearly 4% and QBE Insurance (ASX: QBE) which is yielding just over 3%. Given the hardening insurance premium outlook there is scope for earnings and dividends to improve here.

Foolish takeaway

Current Suncorp shareholders will be pleased with the recent share price performance and special dividends either received or that may come their way shortly. Capital management initiatives such as the sale of ‘bad bank’ and special dividends coupled with an improving insurance outlook do bode well for the company, however at current valuations it could be risky for new investors to jump on board.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, 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.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur owns shares in QBE Insurance.

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