QBE Insurance Group Ltd shares plunge to 10-year low: Is it a bargain?

The QBE Insurance Group Ltd (ASX: QBE) share price this week hit a 10-year low on precisely zero news flow out of the company.

What happened?

The plunge in the share price, from $15 in the middle of last year to just $9.76 at the time of writing has come as a surprise to a number of analysts that have forecast a solid full-year result release on 23 February.

Commsec data suggests that QBE will report earnings of around 78 cents per share, and based on a 55% payout ratio should announce a full-year dividend of between 40 and 45 cents per share.

This places QBE on a trailing (although it hasn’t been announced) price to earnings ratio of 12.5 and dividend yield of 4.1%.

Looking one year ahead, again Commsec suggests that earnings of 100 cents per share are possible and with the group’s management predicting a payout of up to 65% of profits, the dividend could improve to 65 cents per share.

This places QBE on a forward price to earnings ratio of under 10 and dividend yield approaching 7% fully franked.

What’s the issue?

The share price plunge has left retail investors scratching their collective heads. Why would a huge company like QBE trade on such a low multiple when earnings are expected to rise by 30% and the dividend is so impressive?

It appears that the biggest question surrounds the insurance margin that QBE will report for the 12 months to December 31 2015. The margin, which is the sum of the underwriting profit and investment income on QBE’s cash hoard is seen at risk of coming in low based on global interest rates remaining low and increasing competition in the marketplace.

Will the share price continue to fall?

QBE’s decline has been surprising for me. I viewed recent weather events in the US as a risk to earnings but may have underestimated the competitive pressure QBE is facing.

I’ll be sitting and waiting until February 23 before making a decision on my investment. I expect the dividend isn’t under threat but negative commentary surrounding the insurance margin will be bad news for the share price!

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Motley Fool contributor Andrew Mudie owns shares of QBE Insurance Group Ltd. You can find Andrew on Twitter @andrewmudie.

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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