IAG’s Dividends Under Further Pressure

Array
(
    [0] => Array
        (
            [0] => ((IAG))
        )

    [1] => Array
        (
            [0] => IAG
        )

)

This story features INSURANCE AUSTRALIA GROUP LIMITED.
For more info SHARE ANALYSIS: IAG
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

As insurance companies mark-to-market the value of their investment holdings the impact of the March quarter has been significant given the falls in global equity markets, GSJB Were noting the S&P/ASX200 fell 14.4% in the quarter and the MSCI World Accumulation Index was down 13.3%.

When the broker applies this to its earnings estimates across the general insurance sector the result is for significant downgrades to forecasts, with Insurance Australia Group ((IAG)) no exception. The broker has cut its earnings per share (EPS) estimates by 18.5% in FY08 and by 0.3% in FY09 to 19.8c and 34.9c respectively to reflect this, its new forecasts comparing to UBS’s reported EPS estimates of 19c and 30c and pre-extraordinary EPS forecasts of 25c and 34c respectively.

Thomson One Analytics shows median EPS estimates for the stock of 24c and 34c over the next two years (note these estimates are before stockbrokers start including the first quarter downgrades in their forecasts). As GSJB Were notes earnings risk for the company remains to the downside and this makes it hard for the broker to get excited about the stock, particularly as on its numbers IAG is trading on 11x earnings in FY09 and this remains high relative to its peers.

A more pressing concern for investors is the potential for the company to cut its dividend payouts given its capital position at a time when it is considering expanding its overseas operations. The latest evidence of this comes from management’s decision to buy back $200 million in reset preference shares when they next come up for a reset in June, the decision all but made for the company given the prefs are now expensive to retain given the recent increases in interest rates.

While the impact on the group’s capital ratios will only be minor UBS, along with JP Morgan and Macquarie, all see it as putting the current level of dividends under pressure, with possible outcomes being a cut in the dividend itself, an underwriting of the dividend and an increased risk of some form of capital raising to address the problem.

For JP Morgan and Macquarie this is enough to justify their Underweight/Underperform ratings but the brokers are the only two with such a negative view on the stock according to the FNArena database. The other brokers and equity researchers that make up the database are split evenly between Buy and Hold ratings, the former largely on valuation grounds given the poor performance of the stock for some time.

The average price target on IAG is $4.22, which compares to the median price target according to Thomson One of $4.10 and a share price range over the past 12 months of $3.21 to $6.23. Shares in Insurance Australia group this morning are weaker and as at 10.50am were down 10c at $3.82.

Click to view our Glossary of Financial Terms