Is QBE Insurance Group Ltd the bargain of 2014?

QBE Insurance Group Ltd (ASX: QBE) is trading close to its five-year low after four straight years of disappointing investors. QBE’s full year 2013 result was just as disappointing as previous years, with a net loss coming in at just over $450 million from a cash profit of $760 million. QBE’s full year dividend of 32 cents per share was well below the 50 cent 2012 distribution and the 87 cents paid out in 2011.

2014 Transition

QBE’s CEO John Neal is promising that 2014 will be a better year. 2013 was heavily impacted by one-off costs which pushed the pre-tax profit of $797 million to the $450 million post-tax loss. The 2014 result can only be improved if QBE can address its troubled US division.

Reviews and Profits

The company has initiated a review of its North American operations that lost $320 million in 2013, with the view of returning the division to profit this year or next. QBE is aiming to achieve relatively stable group gross written premium (revenue) and net earned premium (premiums paid) this year, but is looking to achieve an insurance margin of 10%, up from 5.5% in 2013. The insurance margin is the ratio of insurance profit to net earned premium.

If achieved, pre-tax profit should jump from $797 million to over $1.3 billion in 2014. Based on a dividend payout ratio of around 50% of earnings, dividends per share could jump from 32 cents in 2013 to 55 cents this year, representing a yield of 5% at the current share price. Analysts consider that this could jump further to 70 cents, or a 6.4% yield, in 2015.

Looking Cheap

For long-term buy and hold investors, I believe QBE looks like an excellent investment. There is certainly a risk that earnings will disappoint this year, but at the current share price below $11, there is greater upside than downside risk in my view. Looking out a couple of years, if QBE can hit analyst estimates in 2015, QBE’s current price represents a price to earnings ratio of 7.9.

Another company with a massive yield is The Motley Fool's favourite income idea for 2014. Check it out 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 2014."

Motley Fool contributor Andrew Mudie owns shares in QBE. You can find Andrew on Twitter @andrewmudie

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.