Should you buy into Suncorp Group Ltd's 9% yield?

Banking and insurance firm Suncorp Group Ltd (ASX:SUN) is on track to trade at its cheapest valuation in several years with a grossed-up yield of around 9%. Is the stock to buy?

a woman

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Suncorp Group Ltd (ASX: SUN) is starting to look interesting again but it isn't so much to do with anything it had to say at its investor day today.

The insurance and banking group really didn't deliver much exciting news. It's good to hear that management is targeting $170 million in savings that will flow straight to its bottom line by 2017-18, but that's hardly material to a group that posted $1.3 billion in net profit in the last financial year.

The stock looks interesting because of how far it is lagging the big banks and the S&P/ASX 200 Financials Index over the past six months.

SUN

Based on consensus estimates, this puts Suncorp on a price-earnings (P/E) multiple of 12.7x for 2015-16, and assuming the forecast is in the money, it would mean Suncorp will be trading on its lowest P/E in at least five years.

What's more, the stock is packing quite a dividend punch. Analysts are expecting a payout of around 84 cents for 2015-16 and that would equate to a yield that's close to 9% once franking credits are included.

I am not saying Suncorp is without risks. One reason why it's lost favour with the market is due to big insurance claims from wild weather in New South Wales and Queensland.

Such events always pose a risk, but from my experience the best time to buy an insurer is a little after they announce big claims.

By extension, the best time to sell them is when the weather is good because the weather, and the share price of insurers, move in cycles.

Right now the cycle looks like it's moving closer to a "buy" although it is not quite there yet. A price range of around $12 to $12.50 would be my sweet spot.

If you are looking for a juicy dividend stock to buy now, sign up for free below to see what the experts at the Motley Fool have uncovered…

Motley Fool contributor Brendon Lau does not own shares in this article. Follow me on Twitter - https://twitter.com/brenlau The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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