Dividend report card: Suncorp Group Ltd

With a fully franked yield of 6.1%, Suncorp Group Ltd’s (ASX: SUN) appeal as an income stock is clear. After all, interest rates have gradually fallen to just 2% in recent years and, with the Australian economy enduring a challenging period, further cuts to interest rates by the RBA seem likely. And, with Suncorp’s yield being 150 basis points higher than that of the ASX, it offers considerable appeal on a relative basis.

Of course, Suncorp’s yield is relatively high at least partly because of the strong dividend growth which has been a feature of the diversified financial company in recent years. For example, during the last five years Suncorp has increased dividends per share at an annualised rate of 16.8% and, when combined with a share price fall of 9% in the last year, this means that the stock holds  income appeal at face value.

Furthermore, Suncorp is forecast to increase dividends per share at an annualised rate of 6.6% during the next two years. This is over four times the current rate of inflation and means that investors in the company are likely to see a real-terms rise in their incomes moving forward. And, with dividends due to be covered 1.2x by profit next year, Suncorp appears to offer a potent mix of headroom when making payments while also reinvesting for future growth opportunities.

On the growth front, Suncorp has vast potential and is set to be aided by an optimisation programme which is forecast to deliver around $170m in savings by financial year 2018. Furthermore, better business intelligence within its banking business should lead to cross-selling opportunities, while Suncorp is aiming to benefit from a dislocated industry structure within the life insurance space to develop its Acclaim IFA programme. Both of these measures, alongside cost savings, mean that Suncorp is expected to post an annualised rise in earnings of 9.6% during the next two years.

Meanwhile, Suncorp’s diversity also holds appeal for income-seeking investors, since it offers greater resilience and stability than may be the case for pure play banking or insurance businesses. Evidence of this can be seen in the fact that Suncorp’s cash flow per share has risen at an annualised rate of 7.6% during the last decade, while its bottom line has also risen by 6.3% per annum during the last five years. And, with Suncorp reporting a common equity tier 1 ratio of 8.86% in its recent quarterly update, it appears to be well positioned to survive the potential challenges in the Australian and global economy.

With Suncorp trading on a price to earnings (P/E) ratio of 14.3, versus a P/E ratio of 15.4 for the ASX, it offers upward rerating potential. This is further evidenced by Suncorp having a price to earnings growth (PEG) ratio of 1.26, which indicates that it offers growth at a reasonable price. As such, as well as being a high-yielding, resilient and financially sound income play, it also offers significant capital gain potential, too.

Despite this, there is another ASX stock that I believe could outperform Suncorp.

In fact, it's recently been named as The Motley Fool's Top Dividend Stock For 2015 and could make a real impact on your bottom line as we move through the year. As a result, it's well worth finding out more about it.

Click here to do so - it's completely free and comes without any obligation.

Motley Fool contributor Peter Stephens has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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