Is the Insurance Australia Group Ltd (ASX: IAG) share price a buy for dividends?
Insurance businesses can be a very attractive way to get dividends into your bank account.
IAG is Australia's biggest insurer, so it benefits from economies of scale and you'd think it has one of the best, if not the best, ways of assessing the risks of policyholders – meaning it has the best chance of getting the price right. Anyone can charge a cheap price for insurance, so you need to make sure you're being properly paid for the risks you're taking on.
Some risks are unavoidable. There seems to be a huge storm every other year that hits Queensland or Sydney which can cost hundreds of millions of dollars. But at least that means IAG can increase its prices to compensate.
Indeed, it was natural disasters that caused IAG to have a pretty tough year in FY19 with cash earnings falling by 10% to $931 million. But, its underlying margin managed to improve by 250 basis points (2.5%) to 16.6% with higher rates.
The key point for dividend investors was that the annual dividend was reduced by 5.9% to $0.32 per share. That translates to a grossed-up dividend yield of 5.9% at the current share price. It's pretty hard to find blue chips, except the banks, offering a decent dividend yield like that.
In the longer-term I do worry about what the effect of automated cars will do to insurers like IAG. Premiums are going to come down, but that's still quite a long time away.
Foolish takeaway
IAG is currently trading at 19x FY20's estimated earnings. IAG isn't a bad idea for a blue chip at this price in my opinion, but I think there are several better ideas for dividends and long-term capital growth.
