Should you buy AMP Limited or Insurance Australia Group Ltd?

When AMP Limited (ASX: AMP) and Insurance Australia Group Ltd (ASX: IAG) reported their results last week, there were quite contrasting performances from two of Australia’s financial powerhouses.

IAG disappointed its shareholders with a weak half year performance, which saw net profit drop 19.5% to $466 million. Whereas, AMP pleased its shareholders with a whopping $1.1 billion full year profit, up 7% year over year.

Strangely, though, since the reports were released it is IAG’s shares which have outperformed AMP’s. During this time, IAG has seen its shares rise by almost 5%, but AMP’s shares have more or less remained at the same level they were at prior to the report.

The big question now for investors to ponder over is which of these two companies offer shareholders the better investment option today?

Despite the tepid half year result which IAG reported last week, I feel they are the better investment for a number of reasons. Firstly, the forward dividend yield of 7% which is most probably going to be fully franked is hard to refuse. This is 1.1% higher than the 5.9% forward dividend yield of AMP, which is expected to be 90% franked. Although earnings growth is predicted by analysts to be on the low side at 2.8%, according to CommSec, IAG has the financial power to grow this dividend in line with earnings.

I also find the diversity of IAG’s business an appealing trait. Not only does it have operations in Australia, New Zealand, and Asia, it is not overly reliant on one particular segment for its revenue. AMP does have a number of different segments, but Wealth Management is by far the biggest. It brings in approximately 61% of the company’s revenue, with the next biggest segment, AMP Capital, accounting for just 10.2% of revenue. Should the Wealth Management segment decline, then it is unlikely the other segments would be able to offset it.

Finally, in my opinion IAG is good value at present on a peer analysis basis. Trading at 14.4 times earnings puts its shares below insurance competitors NIB Holdings Limited (ASX: NHF) and QBE Insurance Group Ltd (ASX: QBE) which trade at 20 and 15 times earnings, respectively.

Foolish takeaway

Although these two companies act in different areas of the financial market and overlap only slightly, I believe just one of these shares is necessary as part of a well diversified portfolio. In this Fool’s opinion, the one to pick is Insurance Australia Group.

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Motley Fool contributor James Mickleboro 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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