The Insurance Australia Group Ltd (ASX: IAG) share price hasn’t had a fantastic couple of weeks on the ASX boards. IAG shares are currently down around 6% since last Monday (11 October), putting them flat over the past month.
This ASX 200 company has had a rather wild 2021 so far. Its shares are up 6.7% year to date on current pricing, with plenty of volatility thrown in.
At the time of writing, the IAG share price is $5.02, up 0.2% for the day so far.
IAG’s miserly performance over the past fortnight or so puts focus on its dividend. As any income investor would know, lower share prices equate to a higher starting dividend yield.
What are IAG’s most recent dividends worth today?
So IAG has paid out two dividends over the past 12 months, as is the custom on the ASX 200. These dividends consisted of a March interim dividend of 7 cents per share, unfranked. This is in addition to the final September dividend of 13 cents per share, also unfranked. That comes out at a total of 20 cents per share for FY21, giving today’s IAG share price a running yield of 3.98%.
That’s a fairly meaty dividend by ASX standards today. It certainly tops what all four of the major ASX banks are currently offering. So what kind of payout ratio does this dividend represent?
The payout ratio is a favourite metric of the dividend investor. It maps out what proportion of a company’s earnings per share (EPS) are being paid out as a dividend. As such, it can lend some useful insights into the company’s financial health, giving an indication of whether or not a dividend is sustainable. For example, if a company is paying out 110% of its earnings as a dividend, it would be a clear red flag that the dividend can’t be maintained at its current level for long.
So how does IAG’s most recent payout stack up? After all, FY21’s total dividend of 20 cents per share is far higher than FY20’s total of 10 cents.
What kind of payout ratio does that give this ASX 200 share?
Luckily, it’s fairly easy to work out. In IAG’s earnings report for FY2021 that it delivered back in August, the company informed investors it managed to bring in 28.51 cents in diluted cash earnings per share. Since IAG paid out 20 cents of that EPS as dividends, we can determine that IAG’s FY21 payout ratio was approximately 70.15%.
In other words, IAG forked out 70.15% of its earnings as dividends and retained the remaining 29.85% within its business. If we use non-diluted cash earnings, the payout ratio is closer to 66%.
Last financial year, IAG delivered 12.12 cents per share in EPS, and forked out 10 cents in dividends, meaning its payout ratio has actually fallen from 82.5% in FY20 to 70.15% in FY21, even though it doubled its dividend.
IAG dividend policy dictates the company will pay out 60-80% of its EPS as dividends, so this latest dividend also meets this criterion.
Given IAG’s optimistic guidance for FY22, it could be likely this level of income can be maintained next year as well (but we shall have to wait and see).
At the current IAG share price, this insurance giant has a market capitalisation of $12.39 billion.