At a time when insurance companies like Insurance Australia Group Ltd (ASX: IAG), AMP Limited (ASX: AMP) and Suncorp Group Ltd (ASX: SUN) are trading at post-GFC highs, one massive global company underperforming them all appears on the comeback trail!
QBE Insurance Group Ltd (ASX: QBE), the $19 billion global insurance behemoth, hit an incredible high of over $35 in 2007 as the company absorbed tens of smaller groups and saw profitability surge to record levels.
The global financial crisis ended all that and poor operational performance of some of these purchased groups brought down the entire company to the point where it recorded a loss of nearly $300 million in the 2013 financial year. The share price plunged below $10 for the first time since 2003 and analysts quickly lost faith in the once-reliable dividend machine.
Massive Turnaround
Most analysts have jumped on board the new QBE story after decisive action was taken by the new management team to strengthen the group's balance sheet and shed unprofitable units in the business. And it appears to be working!
QBE's new management team completed an oversubscribed equity raising in September 2014, a $700m debt issue was completed in November, the group's US agency businesses were sold for $300m in January, and the Argentinian worker's compensation business was sold for US$95m in February.
At the end of 2014, QBE generated Gross Written Premiums (GWP) of over $US16 billion and a net profit of over $900 million. As far as we know, QBE remains on track to hit full-year guidance of gross written premium (GWP) between US$15.5bn and US$15.9bn, net earned premium (NEP) between US$12.6bn and US$13.0bn, and combined operating ratio (COR) between 94% and 95%. Analysts expect this to convert to earnings per share (EPS) of 72.5 cents and dividend per share (DPS) of 40.5 cents this year and up to 84 and 49 cents next year.
Should you have confidence?
QBE will report its half-year results in August and shareholders have reason, for the first time in many years, to be relatively confident. Why?
- QBE hasn't lowered its forecast (and there haven't been any major disasters)
- QBE's forecasts appear achievable
- QBE is more resilient now
Should you buy?
All of the above is great, but that doesn't answer the question of whether now's a good time to buy. At the peak of the GFC, QBE reported net profit of $1.925 billion, earnings per share (EPS) of $2.17, and dividend per share (DPS) of 122 cents. This represented a price to earnings ratio of 16 and dividend yield of nearly 4%.
At today's price and earnings forecasts, QBE is trading on a lofty price to earnings ratio of 19 and dividend yield of nearly 3%. If we look two years into the future analysts expect QBE to be trading on a forward price to earnings ratio of 15 and dividend yield of nearly 4%.
