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NAB, AMP and Insurance Australia Group: Buy, sell or hold?

Do these financial stocks deserve a place in your portfolio? Here’s our take.

NAB

Source:

Buy: National Australia Bank
Dividend yield: 5.2%

NAB (ASX: NAB) has had a great 12 months, rising 38% and outperforming the three other major banks in share price growth. The company is seeing improved conditions in the UK and is aggressively targeting the Australian residential mortgage market while reducing the overall risk profile of the company.

Recent analyst notes have been overwhelmingly positive, with many having a price target of $40 on NAB due to renewed confidence in management, the strong dividend yield, and the prospect of meaningful earnings increases from the bank’s UK operations. NAB will benefit from growing consumer and business confidence, and a surge in home loans due to the lowest interest rates on record.

Hold: AMP
Dividend yield: 5.2%

AMP (ASX: AMP) delivered a disappointing first-half earnings result, sending the shares down over 20% between May and July as greater than expected wealth protection claims impacted earnings. While analysis at the time was generally positive, believing the result to be a one-off, recent commentary has started to examine the difficulties facing the company in the short to medium term.

While insurance claims appear to be a short-term issue, AMP faces headwinds in its managed super division due to recent legislative changes that require detailed reporting of fees and charges. This is expected to cut profit significantly and may impact a key part of AMP’s investment appeal — its dividend. The full year dividend has dropped from 30 cents per share in 2011 to 24 cents per share in 2013 with the trend not looking like it will be reversing. Long-term AMP investors will always remind you that it floated at around $20 in the 90s.

Hold: Insurance Australia Group
Dividend yield: 5.6%

Insurance company IAG (ASX: IAG) reported a remarkable 275% increase in net profit on flat revenue, and more than doubled the dividend payout for the year ending 30 June. The result was in stark contrast to recent years, which have seen IAG’s profit cut by frequent natural disasters and poor returns on invested funds. Analysts have been divided about the future of the company’s share price, with a few questioning whether this year’s share price gain is purely a function of a higher dividend payout and fewer natural disasters, which are outside IAG’s control.

I believe they have a fair point, with CEO Mike Wilkins playing down IAG’s ability to post similar profits this year as claims cannot be expected to stay at current depressed levels. On the plus side however, the company is expanding into Asia and has discarded its troubled UK business which will hopefully result in revenue and profit. The share price appears to be vulnerable to a steep drop if we see any significant natural disasters this summer.

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Motley Fool writer Andrew Mudie does not own shares in any of the companies mentioned.

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