Insurance Australia Group Ltd (ASX: IAG) has been one of the most impressive dividend companies of the last few years. In the absence of any major disasters, the company has been able to pay out over 36 cents per share in dividends for the last two financial years compared to just 17 cents the year before.
6.5% dividend yield!
Over this time, IAG's share price has struggled to break its trading range of between $5.50 and $6.25, implying a dividend yield of around 6.5% fully franked, or 9.28% grossed up.
Things are changing though! Before this week's $500 million purchase of IAG shares by Berkshire Hathaway, analysts were predicting IAG will pay out a 29 cent dividend this year and 33 cents next year. The drop is due to IAG forecasting gross written premium growth at the lower end of its 17-20% guidance range and an insurance margin of 10.5-12.5% (down from 14.2% due to weather-related claims in NSW and QLD). This equates to a yield of just 5.3% before the price jumped early this week.
Berkshire's Impact
Analysts are now coming out with revised forecasts for IAG's earnings and dividend for the year ahead based on their estimate of the 3.7% stake issued to Berkshire Hathaway. Citi Group estimates that IAG's 2015 earnings per share will be 3% lower and 2016 earnings per share will be 10% lower, while JP Morgan estimates that 2016 earnings will be 6.5% lower. If IAG maintains its stated dividend payout ratio target of between 60% and 70% of earnings, it can be expected that the dividend will fall by a similar amount.
Is this a concern?
Investors in Australia's listed insurers know the ups and downs that the industry brings. One needs only look at the volatility of the share price of IAG, Suncorp Group Ltd (ASX: SUN) and QBE Insurance Group Ltd (ASX: QBE) over the last 10 years to understand that Berkshire's stake in IAG will have less of an impact on IAG's share price than its operational performance. Another disaster on the east coast of Australia will hurt IAG and Suncorp's earnings, while the same in the US will seriously impact QBE's earnings.
Is Insurance Australia Group Ltd's dividend going to fall?
Yes, yes it probably is. However it could well recover next year and the analysts at Credit Suisse are even predicting a special dividend in the 2016 financial year as IAG doesn't have any immediate use for the $500 million raised from Berkshire Hathaway.
