MENU

The dividend investor’s guide to QBE Insurance Group Ltd in 2016

It’s hard to get excited about QBE Insurance Group Ltd’s (ASX: QBE) current 3.5% dividend yield.

But this is set to change from 2016 as the company finally gets back into shape after years of binging on unhealthy acquisitions.

Here’s your guide to buying QBE Insurance for its dividend in 2016:

Financial performance

QBE is on track to significantly improve earnings in 2016. The cumbersome subsidiaries have been sold off, impairments have been taken and the company has completed a cost efficiency program which should save investors hundreds of millions of dollars.

The result has been a dip in revenue, but a big increase in profit margins and free cash flows. For dividend investors this is good news.

In addition, because over half of QBE’s ‘insurance profit’ actually comes from investing policy holder funds, the recent increase in U.S. interest rates will help to lift investment returns.

The newly-strengthened company has allowed directors to raise the maximum dividend pay-out ratio from 50% to 65% of cash profits, starting with the 2016 interim dividend paid out in October 2016.

QBE Insurance, or IAG?

Given the choice between QBE Insurance and the recently re-branded Insurance Australia Group Ltd (ASX: IAG), QBE in my view is the better pick for dividend investors in 2016.

Both companies operate on similar ‘combined’ ratios which represent the percentage of earned premiums which get eaten up by operating costs and pay-outs on claims. For the half year to 30 June 2015 QBE had a combined operating ratio of 93.4%, compared to IAG’s 94.8%, but it is targeting a full year combined ratio of between 94% − 95%.

  QBE Insurance Group Ltd (ASX: QBE) Insurance Australia Group Ltd (ASX: IAG)
Combined operating ratio 93.4%¹ 94.8%²
Yield (trailing 12 months) 3.5% 5.4%
Price/Book ratio 1.6 3.6

¹QBE Half year to 30 June, 2015. ²IAG 12 months to 30 June 2015.

Although IAG’s dividend yield is currently higher than QBE, the combination of higher profit and an increased dividend pay-out ratio will likely see a big jump in the cash to be distributed to QBE shareholders.

In addition, at its current share price QBE looks like better value than IAG when comparing the price-to-book ratio, a measure of relative asset value (excluding intangible assets). This may offer some protection if unexpected volatility strikes.

Foolish takeaway

A strong earnings outlook, the prospect of a strong dividend and current relative value makes QBE Insurance a solid dividend pick for 2016 in my view.

A better dividend than QBE? Get our Top Dividend Stock for 2016

Our resident dividend expert names his Top Dividend Share for 2016. Not only are the shares dirt cheap, the company is trading on a 5.6% fully franked dividend yield. Simply click here to gain access to this comprehensive FREE investment report, including the name of this fast growing ASX dividend share. No credit card required!

Motley Fool contributor Regan Pearson owns shares of QBE Insurance Group Ltd.. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.