Is the IAG (ASX:IAG) share price set to outperform? Here’s what Motley Fool Australia analyst Drew Flowers says

Here’s what Drew Flowers expects from IAG’s stock over the next 5+ years.

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The Insurance Australia Group Ltd (ASX: IAG) share price is currently trading at near 9-year lows despite the company posting consistently stable results.

At the time of writing, the IAG share price is $4.55, 0.44% higher than its previous close.

The insurance provider that operates through brands such as NRMA and CGU has struggled lately.

Over the last 18 months it – and much of Australia – has faced bushfires, floods, and hail events.

On top of that, the company was forced to pay out certain interruption claims as the pandemic slowed Australian businesses.  

So, with all that behind it, is the IAG share price’s heyday approaching and can it beat the performance of the S&P/ASX 200 Index (ASX: XJO)?

Here’s what The Motley Fool Australia analyst Drew Flowers thinks.

What might be in store for IAG?

According to Drew Flowers, much of IAG’s strength comes from its brands.

The company operates insurance brands with strong customer appeal and ‘stickiness’. They also tend to be front-of-mind when Australians are looking for insurance products.

Additionally, following a $650 million capital raise, the company is well funded going forward.

Flowers stated:

Insurance often moves in cycles and the last 18-months or so has been pretty horrible.

If you’re the contrarian minded, you’d say; ‘they’ve had a really tough run. However, the balance sheet is in great shape, the valuation is really attractive, they’ve got this really strong market position, great brands with the consumers’ and if we believe these are cyclical type of activities – putting to one side, the effects of climate change and so forth – this level of intensity in such a short time is not the norm.

Now would be the time to have a look at it.

However, Flowers also noted that there are a few red flags being waved by the company recently.

Firstly, its board has had some notable turnover. It could also be argued that the company has had management issues.

One example of such an issue is the aforementioned business interruption claims, which were brought to Australian courts partly because they weren’t updated to refer to current legislation.

The company also recently announced that the Australian Securities and Investments Commission is taking it to court on allegations it mislead customers by failing to fully apply promised discounts.

Will the IAG share price outperform the market?

Now, down to the nitty-gritty. Flowers believes the IAG share price will probably slightly underperform the broader market over the next 5+ years.

IAG already has a large slice of the Australian insurance market. Thus, to create growth the company will likely have to increase insurance premiums. Flowers noted:

I just don’t know if they can grow policies enough. It all comes down to price increases over the next few years… but they’re still only growing premiums [by] 3.8% [to] 4%.

However, he still thinks the company could beat the market for a particular type of investor:

If you are purely an income focused investor and you can take advantage of the franking credits… if we look at the dividend historically [and] if we can get back to similar levels… you might be getting a yield of [between] 6% [and] 6.5%.

If you add franking on top of that, you don’t need too much growth to get over that 10% bogey that we generally look for in the long term.

Flowers also commented that there is a possibility IAG will face a takeover at some point in the future. He pointed to Berkshire Hathaway as a potential takeover candidate.

If you like how Flowers thinks, you can find his full breakdown in video form, shared by The Motley Fool Australia YouTube channel, here.

IAG share price snapshot

The IAG share price is currently 3.6% lower than it was at the start of 2021.

It has also fallen 11% since this time last year and 10% over the last 30 days.

The opinions expressed in this article were as at November 2021 and may change over time.

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.Motley Fool contributor Brooke Cooper has no position in any of the stocks mentioned. Motley Fool contributor Drew Flowers has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Insurance Australia Group Limited. 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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