Should you buy Suncorp Group Ltd for its market-thumping dividend?

There are a lot of strong dividend shares on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) for income investors to choose from. But one share which stands out for me is insurance and banking giant Suncorp Group Ltd (ASX: SUN).

The company’s share price has had a disappointing time of late and is currently down by over 12% in the last 12 months. This is thanks largely to a disappointing half-year result that saw group net profit after tax drop 16% to $530 million from $631 million in the prior corresponding period.

The good news for income investors is that the drop in its share price does now mean that Suncorp’s shares are expected to provide an estimated fully franked 6.2% dividend in FY 2017. This not only beats the current market average by a full 1.9%, but is also a bigger dividend than insurance rivals QBE Insurance Group Ltd (ASX: QBE) and Insurance Australia Group Ltd (ASX: IAG).

This dividend is undoubtedly great, but the big question is whether Suncorp can reignite its earnings growth to put it in a position to pay it. Personally, I think the answer to this question is yes. I feel Suncorp is positioning itself for growth thanks to the new strategy it is undertaking.

One of the major disappointments in its half year results was the drop in its insurance trading result ratio. This ratio is a key measure of profitability and is defined as the ratio of underwriting profit plus investment earnings on asset-backing-technical-reserves to premium revenue. It dropped to a lowly 10.1% from 14.8% year on year due to an unexpectedly high increase in claims.

Suncorp’s CEO Michael Cameron has set an insurance trading result ratio target of 12% for the medium term and appears confident in reaching it. In February he stated that: “We have moved quickly with an intervention strategy designed to restore performance. Our target is to deliver lower working claims costs, which together with other initiatives, will drive a higher underlying ITR for the full year.”

I believe this new strategy and changes to its operating model will deliver cost efficiencies and enhance the company’s profitability in the future. Some of the changes to its operating model are aimed at increasing customer satisfaction levels, which I think should help increase retention levels and positively impact its bottom line.

Overall I feel confident that the company is on the right path now and could potentially surprise the market when it announces its full year results early next month. Whilst I would not expect any fireworks from Suncorp, I feel the potential for steady growth for both its earnings and dividend over the next few years makes it a good investment today.

Finally, if you're looking for even more dividend ideas then I would highly recommend these three blue chip shares. Each pays a solid dividend and could provide share price gains for investors in the coming months in my opinion.

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Motley Fool contributor James Mickleboro has no position in any stocks mentioned. 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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