Should you buy Insurance Australia Group Ltd or Medibank Private Ltd?

Investors looking for reliable dividends are often attracted to insurers, as a result of those businesses’ reliable earning streams and portfolios of income-earning shares and bonds.

Traditionally, Insurance Australia Group Ltd (ASX: IAG) has been a favourite among dividend investors. However, the recent launch of household name Medibank Private Ltd (ASX: MPL) saw a significant number of household investors buy in as a result of its market dominance and brand power.

Indeed for some investors, Medibank Private was their first ever purchase – but which is the better bet, Insurance Australia Group, or Medibank Private?  Here’s what I think:

Medibank Private Ltd – yields 3.2%, fully franked


  • Revenue rises over time as a result of government increases to insurer premiums
  • Potential to further reduce claim expenses, lifting profits and potential dividend payouts
  • Large enough to negotiate (read: demand) more favourable terms with service providers like hospitals


  • Experienced CEO departing after many years of service, must find replacement
  • Stiff competition, recent underinvestment in brand saw loss of market share to competitors
  • Pricing of health insurance reportedly becoming critical; individuals reducing cover

Insurance Australia Group Ltd – yields 5.5%, fully franked


  • Great, robust dividend
  • Some overseas revenues from NZ (20%) and Asia (3%)
  • Warren Buffett is significant shareholder


  • Highly competitive industry
  • Headwinds in form of weakening housing market + domestic economy, which could hurt premiums
  • Profit and risk-sharing arrangement with Berkshire Hathaway (Warren Buffett) subsidiary company

While both IAG and Medibank operate in very competitive industries, I would tend to lean towards Medibank as my first pick. Even accounting for a potential dividend increase after Medibank’s recent profit upgrade, I believe IAG’s dividend is likely to remain higher than Medibank’s over the next few reporting periods.

However, I believe IAG faces more severe headwinds from a weakening house insurance market, and also has the additional uncertainty regarding the advent of driverless and/or smarter vehicles over the next decade or so (IAG earned 30% of its revenue from Motor insurance in 2015).

On a forward basis, Medibank and Insurance Australia Group look to trade on a similar Price to Earnings (P/E) ratio as each other.

As a result of all these factors, if I had to pick one company, I would prefer to buy Medibank over Insurance Australia Group today.

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Motley Fool contributor Sean O'Neill 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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