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The ASX 200 financial stock with a $700m cash splash for investors

We are unlikely to see the same sort of capital returns in 2020 as we have this year. But there are still some that are likely to hand back hundreds of millions to shareholders over the next 12-months.

One candidate is the underperforming Insurance Australia Group Ltd (ASX: IAG) share price. Citigroup believes it will be undertaking a $700 million capital return that is evenly split between the first half and second half of calendar 2020.

This is one reason why the broker upgraded the stock to “buy” from “neutral” and increased its price target to $8.75 from $8.60 a share.

This gives the stock around a 20% upside if dividends and franking are included. That’s not bad given that we seem stuck in a low-growth environment.

IAG in an upgrade cycle?

But it isn’t only capital returns that prompted Citi to take a more bullish view on the stock. The broker believes that the market is underestimating its growth potential in FY21 and beyond.

It is forecasting earnings per share (EPS) growth of 10% for the next financial year that is aided by further margin expansion on its commercial insurance and a share buyback that is part of the group’s capital return program.

“Our analysis suggests, dependent to an extent on the commercial insurance cycle, it will be plausible for IAG to achieve 4-6% EPS growth for FY22 and beyond. (We estimate 4% – vs. consensus ~2% – growth in FY22E),” said Citi.

Can the stock outperform in 2020?

A turnaround in sentiment would be welcomed by shareholders as the IAG share price is lagging the broader market. The stock is up less than 10% since the start of calendar 2019 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is double that.

In contrast, the QBE Insurance Group Ltd (ASX: QBE) share price jumped 23% while the Suncorp Group Ltd (ASX: SUN) share price struggled to hold at breakeven for the year.

While IAG is not considered a value buy as its trading on a FY21 price-earnings multiple of around 18 times, Citi thinks its solid outlook and capital return should put it in the good books of investors, especially given that most in the financial sector are under a dark cloud.

Other growth avenues

What’s more, there are three other growth levers for the group.

“We see scope for IAG to continue its recent growth in Victoria via its IMA JV thereby lifting its relatively low market share,” said Citi.

“Through partnering with NRMA, we also see potential for some recovery in market share in NSW home. Commercial lines GWP headwinds should also soon begin to abate as portfolio remediation ends and price increases continue.”

Where to invest $1,000 right now

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Motley Fool contributor Brendon Lau 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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