Is it time to buy Insurance Australia Group Ltd shares?

Insurance Australia Group Ltd (ASX: IAG) (“IAG”) is one of Australia’s largest insurers, with a market capitalisation of $13 billion. It’s also a favourite of dividend-seeking investors, because of its strong financial position and reliable income.

IAG has $14 billion in investment assets, $1.8 billion in interest-bearing liabilities (debt), and $7 billion in net assets (including $2.9bn in goodwill) once liabilities are subtracted. It’s a decent financial position, and with a dividend payout ratio of between 60%-80% (up from 50%-70% previously) of reported full year cash earnings, investors can expect decent dividends. IAG also does its best to maintain dividends for shareholders, and over the past 10 years dividend payments have been less volatile than earnings.

For instance, IAG paid out 47% of its earnings in the six months to December 2014, but 63% of earnings in the six months to December 2015, when profit fell. Total dividend payments remained the same, with $304 million in 2014 and $316 million paid in 2015.

IAG is a solid investment idea for investors looking for semi-reliable and reasonably defensive income, and its dividend yield is routinely greater than 5%, which is more attractive than other competing ideas like Woolworths Limited (ASX: WOW), Wesfarmers Ltd (ASX: WES), or Medibank Private Ltd (ASX: MPL).

What IAG isn’t is a growth stock; but the company has operations in several south-east Asian nations, and is looking at further expansions, including into India. The vast majority of the company’s earnings currently come from Australia and New Zealand, which are mature markets in which insurance coverage levels are high and growth in premiums is low.

South-East Asian operations do offer a great opportunity over the long term, but it’s hard to envisage growth in those areas becoming a significant contributor to earnings this decade, thanks to lower wages (and thus lower premiums relative to the ANZ region), vastly lower levels of insurance coverage, and likely a lower perceived need for insurance.

Foolish takeaway

Limited growth means that price becomes a vital consideration for any investor looking to build a stake in Insurance Australia Group. Speaking for myself, I would prefer to pick up shares at around 12 or 14 times earnings, or alternatively below $5 – but shares have only traded at this level a handful of times in the past few years. Instead it may be better to build a position incrementally over time, taking the opportunity to average down your costs where possible.

Looking for a secure and reliable dividend income?

Look no further! Discover these 3 "new breed" blue chips that pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to discover our latest free report on these three outstanding investment opportunities.

Simply click on the link, enter your email address, and we'll send you our full coverage for free - no credit card details or payment required!

What are you waiting for? Just click here now for your copy.            

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.

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.