Insurance Australia Group Ltd (ASX: IAG) shares are benefiting from an improving profit outlook. Just look at the chart below, IAG is up around 30% over the past year.
The business operates some of Australia's leading insurance brands including NRMA Insurance, CGU, Swann Insurance and WFI.
The broker UBS recently lifted its forecasts for IAG shares to reflect a "likely margin overshoot" over the next 12 to 19 months. UBS thinks the market consensus' estimate that the profit margin will peak at 15.2% is "on the low side" for FY25 to FY26. UBS estimates the peak could be 16%.
The current share buyback – which is around three-quarters complete – is "also likely to support the stock into the FY24 results".
With that in mind, let's look at how much profit the business is predicted to make in the next few years.
FY24
The 2024 financial year is nearly over, but we're still a few months away from learning how much profit the business has made for the full 12-month period to June 2024.
UBS suggests IAG might make net profit after tax (NPAT) of $984 million in FY24, which would be an increase of around $150 million compared to FY23.
The broker has forecast the earnings per share (EPS) could rise to 39 cents, up from 32 cents in FY23, which would be an increase of more than 20%.
If that happens, it would put the IAG share price at 16x FY24's estimated earnings.
FY25
The higher profit margin could lead to net profit rising again in the 2025 financial year, which could be beneficial for IAG shares.
The forecast from UBS predicts IAG could generate net profit after tax of $1.05 billion in FY25, which would be an increase of around $60 million (or 6%).
In EPS terms, IAG shares could see another 5% increase to 41 cents. This would put the IAG share price at 15x FY25's estimated earnings.
FY26
The 2026 financial year could see another rise in profit, taking NPAT to $1.12 billion, which would be a year-over-year increase of 7.5%.
IAG could see its EPS go up by another 4.9% to 43 cents. This would put the IAG share price at under 15x FY26's estimated earnings.
Dividends
Don't forget the business usually pays a decent dividend as well each year.
UBS's projections suggest IAG could pay a dividend yield (excluding franking credits) of 3.7% in FY24, 4.6% in FY25 and 4.9% in FY26.
The market is sensing a better financial return from IAG shares (with the market capitalisation's rise), and if UBS is right then investors may still be underestimating the business.
