Why now could be 'a great time' time to buy IAG shares

Atop the past year's 17% share price gain, IAG stock trades on a 2.6% dividend yield.

| More on:
A man sits thoughtfully on the couch with a laptop on his lap.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Insurance Australia Group Ltd (ASX: IAG) shares have been exceptionally strong performers over the past 12 months.

Since this time last year, shares in the S&PASX 200 Index (ASX: XJO) insurance company have gained 17%.

That compares to a far more meagre 1% gain posted by the ASX 200 over that same time.

And IAG shares also pay dividends, trading on a partly franked yield of 2.6%.

But even with those gains already in the bag, now could still be an opportune time to buy into the insurance stock.

Here's why.

IAG shares offer a means to protect revenue in risky, uncertain times

IAG shares could benefit from a number of global factors that tend to drag on most ASX 200 shares.

First, there's the worrying rise in global uncertainty and risk, underlined by the recent Hamas attack on Israel and mounting tensions across the Middle East.

You can add global cybercrime, Russia's ongoing war in Ukraine, and increased risks relating to climate change to the list of worries that could hinder the performance of many ASX 200 stocks.

But, according to John Neal, Lloyd's of London CEO, don't add insurance stocks to that list.

"It's a great time to be an insurer, because if we live in a world that's riskier and more uncertain, then insurance comes to the fore," Neal said.

"Rather than the insurance being an expense, it suddenly becomes a way to protect your revenue, your profit and loss statement, your balance sheet."

Adding to global uncertainty in the year ahead is a surge of national elections set to be held in some of the world's leading economies, including what could be a turbulent election in the United States.

But again, this could benefit IAG shares and insurance stocks more broadly.

According to Neal:

Even on a simple level, just changing governments brings an added query as to what it means from a risk point of view. I think at a corporate level, people are beginning to understand the intangible value of the balance sheet.

But how about the impact of sticky inflation and potentially higher interest rates?

Inflation and interest rates

For some insight into how IAG shares have performed in a year of rising interest rates and stubbornly high inflation, we turn to the insurer's FY 2023 results, reported on 21 August.

Among the highlights, IAG reported an 8.2% year on year increase in revenue to $19.85 billion. Net profit after tax (NPAT) leapt 139.8% to $832 million. Profits surged despite a 20% increase in total claims paid, which hit around $10.2 billion over the financial year.

IAG managed to deliver this strong performance in part due to some sizeable increases in its insurance premiums.

As Motley Fool analyst Tony Yoo pointed out, "As an essential service, insurance providers have been able to raise premiums this year in line with inflation without worrying too much about losing customers."

As for higher interest rates that tend to crimp the performance of many ASX 200 companies (especially those holding debt), higher rates tend to benefit insurance companies as they get higher returns from the premiums they invest.

That was demonstrated in IAG's FY 2023 results, with management reporting a 9.6% credit margin, up from 7.4% in FY 2022.

As for what may lie ahead for IAG shares, Wilsons analyst Greg Burke said:

IAG is poised to deliver the strongest earnings per share (EPS) growth over the next 3 to 5 years out of the ASX listed general insurers, with risks skewed to the upside (vs consensus), in our view.

Potential headwinds for IAG shares

While the broader picture looks strong for IAG shares, investors should always run their slide rules over any potential upcoming headwinds.

In the case of this ASX 200 insurer, downside risks could stem from ongoing legal claims currently in front of the Federal Court. The claims, totalling some $7 billion, relate to credit insurance coverage written by Bond & Credit Company for then client Greensill Capital.

IAG held a 50% interest in Bond & Credit Company until April 2019.

Greensill Capital has since collapsed.

IAG denies responsibility for the claims and is defending itself in court.

In some potential added headwinds for IAG shares, however, yesterday The Australian Financial Review reported that White Oak, already a plaintiff in the case, intends to file new legal claims relating to Greensill Capital's insurance policies.

The outcome remains to be seen.

Motley Fool contributor Bernd Struben 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 has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Financial Shares

A woman holds up her hand in a stop gesture with a suspicious look on her face as a man sitting across from her at a cafe table offers her flowers.
Mergers & Acquisitions

Perpetual share price leaps 11% on $3.5 billion Soul Patts takeover rejection

Perpetual’s board believes the Soul Patts takeover offer materially undervalues its businesses.

Read more »

A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer
Financial Shares

Turnaround? Here's why the Magellan share price is bouncing today

Is the Magellan ship finally turning around?

Read more »

Man in business suit carries box of personal effects
Financial Shares

IAG share price higher amid news of legal counsel's departure

There is some unexpected news from the ASX 200 insurance giant today.

Read more »

A male investor wearing a blue shirt looks off to the side with a miffed look on his face as the share price declines.
Financial Shares

Why did AMP shares sink 11% in November?

A disappointing update weighed on this financial services company's shares last month.

Read more »

ASX share price on watch represented by woman investor looking at ASX financial results on laptop
Financial Shares

What's the outlook for Macquarie shares in 2024?

Can Macquarie return to growth next year?

Read more »

A group of businesspeople clapping.
Dividend Investing

Which ASX 200 financial share will pay the best dividend yield in FY24?

Is it a bank? Is it an insurer? Is it an investment company?

Read more »

A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.
Financial Shares

What's the outlook for IAG shares in 2024?

Could 2024 be as good as this year?

Read more »

A man sits in deep thought with a pen held to his lips as he ponders his computer screen with a laptop open next to him on his desk in a home office environment.
Financial Shares

Can AMP shares reach $1 by Christmas?

Can AMP shares get out of the penny stock range by Christmas?

Read more »