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Why Suncorp Group Ltd’s profit just dropped 15.8%

Suncorp Group Ltd (ASX: SUN) reported its half-year result for the six months to 31 December 2017 this morning.

Here are some of the highlights compared to the prior corresponding period:

  • Insurance (Australia) net profit after tax (NPAT) down 28.5% to $264 million
  • Banking and Wealth NPAT down 5.3% to $197 million
  • Cash earnings down 19.2% to $472 million
  • Earnings per share (EPS) down 15.7% to 34.66 cents
  • Interim dividend maintained at 33 cents

Suncorp said that it had made good progress as there was good top line growth for the half-year. Australian motor and home gross written premiums (GWP) grew by 3.9% with unit growth up and the market shares of its businesses stabilising. A focus on insurance claims processes has driven margin expansion.

The commercial insurance segment prioritised margin improvement over growth in units. The life business improved ‘underlying’ NPAT by 56% to $39 million. Suncorp Bank experienced loan growth of 8.7%, which beat the average of its peers. New Zealand consumer GWP grew by 11% which was driven by unit and premium growth, leading to NPAT growing by 81%.

Suncorp said that this result was impacted by the significant business investment and the impact of the Victorian hail storm. I’m not sure that the hail storm should be a mitigating factor for an insurance company, as it’s part of doing business.

Suncorp CEO, Michael Cameron said that the increased focus on Suncorp’s four strategic priorities, in-particular the elevating the needs of customers, had helped deliver solid top line performance.

Outlook

The company believes that NPAT in the second half will be higher than the first half.

Suncorp expects that there will be a significant uplift in performance in FY19 and FY20. It thinks that the business improvement program will reduce operating expenses back to $2.7 billion.

Management believes that the ground work the company is doing will improve margins, such as an expected cash return on equity of 10%.

The plan for future years will be to increase the dividend payout ratio and excess capital will be returned to shareholders.

Foolish takeaway

There were some good pieces of news in this report, but the overall profit decline makes it a disappointment in my eyes, certainly compared to its rival Insurance Australia Group’s (ASX: IAG) report.

It’s currently trading with a grossed-up dividend yield of 7.83%, which is the only reason I’d consider the share because I don’t believe it will provide market-beating total returns at the current price.

Instead of Suncorp, I’d want to buy these shares that have a much better chance of beating the market.

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Motley Fool contributor Tristan Harrison has no position in any of the 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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