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Suncorp shareholders need to be in it for the long run

It’s been a rocky road for Suncorp (ASX: SUN) in the past 12 months. Although the company has had no mass floods, fires or cyclones to deal with, it is still clambering to its feet after the GFC — something investors may have forgotten.

No stock is a buy at any price and investors who took advantage of Suncorp’s low price 12 months ago have been rewarded with 40% capital gains and dividends. However at current prices, investors may be a little worried, and justifiably so.

With a P/E of 26 investors may feel they have run up the share price to unsustainable levels and the next 12 months will require deep pockets. Perhaps it will, perhaps it won’t. Short-term fluctuations are as much about luck as they are about investing.

The group’s recent financial update took its toll on the share price and may have caught some investors off guard. Since the GFC management has been relentlessly focusing on paying down its ‘bad bank’ loans, which consisted of commercial property loans to developers in Queensland. This year management has rid the company of the debt by taking a long-term view to sustainability, something shareholders should be happy about.

Although the company’s recent rise in share price was well-deserved, shareholders looking to make a quick buck might end up holding the shares for longer than expected. Since their updated guidance last week, the share price is slightly lower and it could remain there until the full-year report is released on August 21.

Loyal Suncorp shareholders have not only been well rewarded with higher share prices, they are now likely to receive a special dividend — something that, according Chairman Ziggy Switkowski, was very “pleasing”. This will take the full-year dividend to 75 cents.

Shareholders in insurance stocks like Insurance Australia Group (ASX: IAG), QBE (ASX: QBE), Challenger (ASX: CGF) and Suncorp have done very well in the past 12 months thanks to healthy stock markets and a benign year of natural weather events which has resulted in fewer payouts and stronger balance sheets.

Foolish takeaway

Like any insurance company, Suncorp’s future is hinges on higher premiums, insurance margins and less payouts. The past year has served Suncorp and other insurers very well but knowing whether or not the next five years’ natural weather events and payout levels will be the same is anyone’s guess. Suncorp has made inroads to meet the challenges faced by the high risks associated with Queensland’s natural weather events and looks to ‘meet or beat’ an Insurance Trading Ratio of 12% — a key measure of profitability.

Suncorp will release its full-year results on August 21. In the meantime, discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

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Motley Fool contributor Owen Raszkiewicz owns shares in Challenger.  

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