Suncorp Group Ltd profits drop, but should you invest for its big dividend?

As earnings season gets into full swing it was the turn of Suncorp Group Ltd (ASX: SUN) to announce its full year results today.

In what I would consider a mixed bag, here are a few highlights from the insurance giant’s results:

  • Group net profit after tax (NPAT) of $1,038 million (FY 2015: $1,133 million).
  • General Insurance NPAT of $624 million (FY 2015: $756 million).
  • Underlying insurance trading ratio (ITR) of 10.6% (FY 2015: 14.7%).
  • Suncorp Bank NPAT increased to $393 million (FY 2015: $354 million), with a net interest margin of 1.86% (FY 2015: 1.85%).
  • Suncorp Life NPAT of $142 million (FY 2015: $125 million)
  • Final fully franked dividend of 38 cents per share (FY 2015: 38 cents), bringing the total dividend to 68 cents per share.

So What?

Whilst this result means group net profit came in marginally higher than analyst expectations, it failed to lift its dividend by two cents year on year as many had been predicting according to data provided by CommSec.

The drop in its core insurance business is of course worrying, but the company has addressed this through its transition to a new operating model which it expects will result in an improved performance.

As well as delivering $80 million in annualised savings, management believes the restructure will improve customer satisfaction across its numerous brands and restore working claims performance.

Now what?

In its outlook Suncorp has stated that in the medium term its key targets are to maintain a flat cost base, improve underlying NPAT, deliver an underlying ITR of at least 12%, and pay a dividend ranging from 60% to 80% of cash earnings.

I’m confident that the changes it has made to its operating model will help it deliver on its all important ITR target. In my opinion it is arguably the most important metric to judge the company’s performance on. The ITR ratio is a measure of profitability which takes the underwriting result plus investment income and expresses it as a percentage of net earned premium.

Although the full year ITR dropped massively from FY 2015, it was an improvement on the first half of the year. This gives me the confidence to believe CEO Michael Cameron’s plans are working and an improved performance is coming in FY 2017.

Although the dividend came in under expectations, a fully franked 5.1% is still an above average yield. I believe this could make an investment in Suncorp a great option for retirees and income investors today. Even after these mixed results, I still believe it is a better option than Insurance Australia Group Ltd (ASX: IAG) and QBE Insurance Group Ltd (ASX: QBE).

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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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