No doubt many investors are surprised by the muted reaction of Insurance Australia Group Ltd's (ASX:IAG) share price to last month's news that Warren Buffett would take a stake in the insurer.
While the stock is still slightly above its pre-announcement price it remains a poor performer over the recent past. In fact, over both the past six and last twelve months, IAG's share price has substantially underperformed the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
In stark contrast, fellow insurer AMP Limited (ASX: AMP) has significantly outperformed the index over both the past six and twelve months thanks at least in part to a substantial turnaround in the market's view of AMP's wealth protection division. Over the longer-term however, IAG has not only been a better investment than the index but it has also dramatically outperformed AMP.
Despite these divergent histories there are a number of reasons to be positive about the outlook for both IAG and AMP.
1) Pricing
Taking a forward-looking view of these two companies, according to data provided by Morningstar IAG and AMP are trading on 2016 price-to-earnings (PE) ratios of 13.8x and 14.9x respectively. In comparison, the Financials index is on a prospective PE of 13.5x.
2) Dividends
Both stocks look reasonably priced compared with the index and likewise they look relatively attractive on a yield basis. In 2016 Morningstar's data suggests IAG and AMP will yield 5.7% and 5.1% respectively. In comparison, the Financials index is on a prospective dividend yield of 5.5%.
3) Growth
According to news reports, Buffett was at least partially attracted to IAG for the exposure it could create for Berkshire Hathaway to Asia; AMP also has some exciting growth opportunities in Asia – so both companies offer shareholders potential growth from expansion into the Asian regions. IAG and AMP also operate in sectors which are set to enjoy long-term tailwinds both domestically as well as overseas which should help them grow at reasonable rates for some time.
