Is the Insurance Australia Group Ltd (ASX:IAG) share price a buy for its 6% yield?

The Insurance Australia Group Ltd (ASX: IAG) share price has gone up by more than 25% in the past year, making it one of the best performing blue chips.

A large part of this performance came from an impressive half-year result with insurance profit up 30.1%, net profit after tax (NPAT) up by 23.5% and cash earnings per share (EPS) up 33.4%. Plus, the dividend was increased by 7.7%. Overall, quite impressive.

IAG has an impressive grossed-up dividend yield of 6%. In its half-year result the cash dividend payout ratio was only 53%, which is very sustainable. Although the full-year ratio may be higher.

Today, the company announced that it has reached agreements to sell its operations in Thailand, Indonesia and Vietnam.

Firstly, it is selling its stakes in the Thailand & Indonesia operations to Tokio & Nichido Fire Insurance Co Ltd for around $525 million.

It is then selling its stake in the Vietnam operations to AAA Assurance Corporation.

All of the above transactions are expected to conclude in FY19 and the company will recognise at least $200 million of after-tax profit.

The profit on the sales won’t be included for dividend calculation purposes and it will enhance the insurance margin by about 50 basis points because the overseas operations have a lower earnings profile. On a pro-forma basis IAG would have a CET1 ratio of at least 1.2 at 31 December 2017, compared to the target range of 0.9 to 1.1.

Foolish takeaway

I believe that IAG is an attractive blue chip dividend share at the current price, if that’s what I were looking for. It is making the right moves to improve its profitability whilst rewarding shareholders with a decent dividend. It’s currently trading at 19x FY18’s estimated earnings.

However, I’m looking for growth, which is why I’m monitoring these long-term share ideas.

Top 3 ASX Blue Chips To Buy

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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 Scott Phillips.

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