Insurance Australia Group Ltd reports: Should you buy for its 5.6% dividend?

As Foolish contributors have covered in a series of articles this year, Insurance Australia Group Ltd (ASX: IAG) faces some headwinds in the way it executes its business. In addition to competition it also faces fundamental changes to the way its products will operate, as well as subdued market conditions across Australia and New Zealand.

Here’s what you need to know about its results today:

  • Gross Written Premiums (“GWP”) fell 0.6% to $11,440 million
  • Net Profit After Tax fell 14% to $625 million
  • Dividends per share fell 10% to 26 cents (excluding 10c special dividend paid in March)
  • Underlying insurance margin (measure of profitability) rose 0.9% to 14%
  • Turnaround in business insurance division
  • Consumer division flat
  • 10% growth in Asia division
  • Retains strong capital position at upper end of target range
  • $300 million off-market buyback announced
  • 2017 outlook for flat premium growth, continued tough conditions in commercial market, $130m reduction from Swann automotive divestment, margins of 12.5%-14.5%, on par with 2016

Solid, but not exciting

IAG’s result came in more or less as forecast. Higher-than-expected disasters had some impact, and the group conducted some impairments as a result of an IT systems simplification and accounting changes to the way it treats its IT assets.

The key consumer insurance division delivered a strong performance, with high margins and good GWP growth that was buoyed by the acquisition of Wesfarmers Ltd (ASX: WES) insurance portfolio. New Zealand was also a standout with even higher margins, although premium growth was slower than in Australia. The business division suffered significantly, with a tough operating environment causing margins to slim by 0.8%, while gross written premiums also declined 6.7%.

Asia had the strongest GWP growth of all, up 7.5%, although as yet the division is relatively insignificant even though IAG is considering increasing its ownership of the Malaysian and Indian businesses.

Digging down through the aspirational statements, it was good to see management’s acknowledgement of a number of issues also faced by other customer-centric organisations like Telstra Corporation Ltd (ASX: TLS) and Medibank Private Ltd (ASX: MPL), whose results we covered here and here.

Each organisation appears to face similar challenges – customers expect ‘better’ and ‘easier’ – and each company’s approach is similar, involving increasing digitisation of services, increasing ease of use and reducing customer ‘pain points’.

IAG specifically aims to increase both the agility and responsivity of the business, especially in response to changing needs and new technology like collision-avoidance/self-driving vehicles and increasingly connected households. The company will provide a strategy briefing to the market in December with more information on its strategy. Management also started reporting changes to IAG’s Net Promoter Score, which will hopefully continue to be covered in future years as this will provide a solid yardstick to measure improvements.

Well, is it a buy?

There are a number of things I haven’t been able to cover for reasons of length such as the off-market buyback (at a discount to current prices) and the Berkshire Hathaway quota share agreement, which management provided some useful tables explaining.

I continue to hold my previous views about IAG definitely not being a business suited for growth-seeking investors. It operates in mature markets and the Asian segment is a long way from being able to pedal the bike on its own.

For income-seeking investors it holds appeal, given the 4.5% fully franked dividend (excluding the special dividend) and reliable earnings. These earnings may prove to be more reliable than I first thought, given the decent turnout of the consumer and NZ business divisions which I feared were facing stagnation. IAG’s quota share with Berkshire Hathaway also reduces its claim expense by 20%, which further reduces the impact of any large claim years.

Given the choice though, I'd be looking more towards Telstra Corporation or one of The Motley Fool's Top 3 blue chips for 2016, which pay fully franked dividends AND offer the prospect of significant capital appreciation. Simply click here to gain access to this comprehensive FREE investment report.

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Motley Fool contributor Sean O'Neill 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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