QBE Insurance Group Ltd raises dividend by 36%

QBE Insurance Group Ltd (ASX: QBE) has reported an underlying net profit of US$807 million for the 2015 financial year, despite significant headwinds.

The company has faced low interest rates for many years – which affects the investment earnings it can generate on its float (pre-paid premiums), but also faced a stronger US dollar, challenging insurance pricing and investment markets.

The adjust profit was up just 1% on the prior year, but 12% on a constant currency basis – reflecting the stronger US dollar.

Gross written premium (GWP) fell 10% to US$14.8 billion from US$16.3 billion – reflecting challenging insurance markets.

The company declared a 50 (Australian) cent fully franked dividend, up 35% compared to the 37 cents per share paid out for the 2014 financial year. At the current share price of around $10.39, that reflects a net dividend yield of 4.8%.

So What?

It appears to be a decent result for QBE, with many indicators heading in the right direction. Return on Equity was up 1% to 7.5%, Insurance and underwriting profits were both up and combined operating ratio (COR) fell to 94% – a good sign for an insurance company.

QBE says it has made close to $400 million of cost savings, including $126 million of incremental benefits in 2015. The company expects to see another $150 million reduction in operating expenses in 2016, and eliminate another $150 million of costs in 2017-18.

Now What?

Given the improved earnings quality and balance sheet strength, QBE has decided to up its dividend payout ratio to 65% commencing from the 2016 interim dividend. That should see shares sport a higher dividend yield.

However, QBE is targeting gross written premium (GWP) of around US$14.4 billion, and a combined operating ratio of around 94-95%, suggesting 2016 results should be roughly in line with the 2015 financial year – obviously depending on many factors beyond the control of the company such as currency and natural disasters.

Foolish takeaway

QBE CEO John Neal has done a stellar job sorting out the mess that was QBE a few years ago and further improvement appears highly likely. Interest rates in the US are rising and should provide a nice tailwind – as long as other factors play their part.

Discover the 'new breed' of blue chips that could take your portfolio higher in 2016

BHP has finally slashed its dividend and abandoned its progressive dividend policy - so forget steady dividends here. Instead, these 3 "new breed" top blue chips for 2016 pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to learn more.

The report is free! No credit card required.

Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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.