Is it time to buy Suncorp Group Ltd?

Should you buy stocks that have hit new highs? It always seems dangerous to pick them up at peaks.

Still, if a stock is going to make any appreciable gains or even become a two or four-bagger over time, it has got to hit and exceed new high after new high.

A stock can be driven up on sheer market sentiment, but when that following disappears the stock could drop. I wait for stocks hitting new highs to come down a bit and show me where the buyers are waiting to come back in.

If they aren’t there, the stock will keep going down. As a rule of thumb, I want to see a stock pull back 5% – 10% from a high and rally back up. If a stock’s story is still good and the reasons it was rising are still in place, then you can feel justified paying for growth at a reasonable price.

That’s the case for Suncorp Group Ltd (ASX: SUN). The insurer and fifth-largest bank came down about 9% from its August high and has rallied back up to about $14.35. It is expecting mid-single digit growth in FY 2015, but I’m looking further ahead to more of the expected benefits from its simplification program to streamline the business.

Looking forward to bigger dividends

The company projects great amounts of savings over the next two years that will really help earnings. In addition, the company intends to return surplus capital to shareholders, so that could mean higher regular dividends and more special dividends – what all dividend investors crave. The stock is currently paying a great 5.9% yield fully franked, so that’s a strong start.

Where to from here?

I believe Suncorp has further to go. Its banking division has improved greatly and there hasn’t been a string of big natural disasters recently. Life insurance is expected to be soft for a while, but that is only a small portion of Suncorp’s business. General insurance is a much greater part of the business. I would expect the company to continue upwards over the next 1 – 3 years.

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Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

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