A blue-chip stock paying a 7% fully franked dividend yield

Have investors over-reacted and punished this stock for potentially immaterial issues?

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Insurance Australia Group Limited (ASX: IAG) is a $12.6 billion insurance company, which owns several well-known brands including NRMA Insurance, CGU and SGIO, but it seems investors are giving it the cold shoulder.

IAG as the company refers to itself, today reaffirmed its guidance for Gross Written Premium (GWP) growth of 3-5% and a reported margin – a key measure of profitability for an insurer – of between 14.5% and 16.5%. IAG says it has 3.5 million customers and holds significant market shares in motor and home segments as well as compulsory thirdy party (CTP) insurance in NSW.

The company has also expanded into Asia, and recently agreed to acquire Wesfarmers Limited (ASX: WES) insurance underwriting business for $1.85 billion. The deal includes an agreement to distribute insurance products through Coles supermarkets for 10 years. Coles is following the lead set by UK retailer, Tesco, by offering more financial products. That could see more of IAG’s insurance products sold to Coles customers.

Rival Suncorp Group (ASX: SUN) says the deal will give IAG 60% of the New Zealand insurance market in some sectors, and was opposed to the deal.

IAG shares are down 7.5% over the past six months, despite a 39% jump in net profit for the six months to December 2013. Investors appear to be worried about the $1.85 billion price tag for Wesfarmers’ insurance unit, with some suggesting it was over-priced. They may also be worried, after the company said in January that it expected slower earnings growth this financial year thanks to increased competition.

Shares in IAG are currently trading at around $5.47 and the company is expected to pay a fully franked dividend of around 35-36 cents over the next two years, putting it on a dividend yield of 6.9%.

Foolish takeaway

With QBE Insurance Group (ASX: QBE) facing some major issues, particularly in the US, IAG looks to have its nose in front of its rivals in the insurance space, and with that juicy, fully franked dividend, could be a worthy addition to your portfolio.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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