Is the Suncorp Group Ltd share price a buy?

The Suncorp Group Ltd (ASX: SUN) share price has grown by 11.4% over the last year.

Suncorp is one of Australia’s two largest insurers, along with Insurance Australia Group Ltd (ASX: IAG). It’s such a large company that it is one of ASX’s top 20 largest businesses.

Here are some reasons why I do and don’t like Suncorp:

Why I like Suncorp:

The biggest reason to love Suncorp is its huge, fully franked dividend. It has a trailing grossed-up dividend yield of 7.27%. Big dividends are very useful in the current climate of very low interest rates.

Another reason why I like Suncorp is its diversified strategy. It has one of the biggest retail bank operations in Australia. It also has many insurance brands servicing various parts of the insurance market. It owns AAMI, Bingle, Terri Scheer, Shannon’s, Vero and Apia.

The final reason why I like Suncorp is that it is trying to decrease costs and improve efficiencies across the business. This is a good move to improve the future profitability of the business and increase the dividend.

What I don’t like about Suncorp:

I have nothing against any of Suncorp’s businesses, but the way that the insurance market is moving probably won’t be positive for Suncorp. In the long term it looks as though automated cars will decrease insurance premiums, Warren Buffett himself has commented along these lines.

A large part of Suncorp’s written premiums are motor related, so there will probably be a hit to earnings at some point. I don’t know when that will be, but I like to invest for the long-term so a hit to long-term earnings isn’t a compelling investment case in my opinion.

The other main challenge for Suncorp to manage is that insurance premiums are increasingly seen as a commodity. People will happily move their insurance to a different company if they can get a better or cheaper quote. Over time this could lead to a price war which hurts all the insurers’ bottom lines. QBE Insurance Group Ltd (ASX: QBE), IAG, Allianz, Youi and all the other competitors are competing for the same customers.

Foolish takeaway

Suncorp is currently trading at 16x FY17’s estimated earnings. This is a reasonable valuation, however Suncorp isn’t my type of investment.

I’d pick Suncorp over some of the other large blue chips such as the retailers, but it’s not on my watch list.

These stocks are on my watchlist, I’m particularly excited about the potential for one of them that should benefit greatly from Australia’s ageing population.

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Motley Fool contributor Tristan Harrison has no position in any stocks mentioned. The Motley Fool Australia owns shares of Insurance Australia Group Limited. 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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