Treasure Chest: Special Dividend From Suncorp?

This story features SUNCORP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: SUN

By Greg Peel

Suncorp Group ((SUN)) had pre-announced its profit result before the actual August 21 release so there were no surprises to be had. Brokers agreed the insurer had come through its difficult transformation and had now de-risked, but there was also agreement there was not a lot of organic growth opportunity ahead in FY14. And ongoing industry-wide structural issues with life insurance will provide a drag.

Insurance Group Australia ((IAG)) posted an absolute cracker of a result – so good in fact, that brokers were inclined to think it could never be repeated, albeit this result was also pre-hinted at. This does not mean brokers no longer like the stock, it just means that IAG’s performance from here won’t be quite so spectacular. At least IAG is not exposed to life insurance drag.

Post results, Suncorp attracted four Buys to one Sell from eight FNArena database brokers while IAG attracted four Sells and no Buys. An investor might assume from the commentary above IAG was the better prospect, but the problem is the market priced IAG as if it were going to have an FY13 result every year.

Positive feeling for Suncorp, despite a subdued outlook, lends a lot to the company’s excess capital and management hints regarding further capital returns. Capital was a good enough reason for Citi to upgrade to Buy post-result. One way to return excess capital is to issue a special dividend, and CIMB insurance analysts have today issued a report suggesting another special will be forthcoming in the second half of FY14.

Suncorp boasted excess CET1 capital of $804m at the end of FY13, notes CIMB, and given the insurance business has been de-risked the analysts feel that all of management, APRA and the ratings agencies would have no qualms if the excess capital level was closer to $500m. That leaves around $300m for a special. And CIMB forecasts excess capital of $1.1bn by end-FY14.

Even if Suncorp were to increase its CET1 target to 8.5%, which is Bank of Queensland’s longer term target, the company would still be rolling in excess, CIMB points out.

On the other hand, despite IAG’s fabulous result its capital situation is a lot tighter. CIMB does not see a special from IAG before FY16 and believes the company will pay out in the middle of its 50-70% range in the interim. CIMB thus prefers SUN to IAG.

Macquarie is also expecting an FY14 special from Suncorp, and has pencilled in 15c. Yet the broker has just undertaken a detailed review of the reserving adequacy of both insurers and in this case IAG comes out the better. IAG’s reinsurance protection and zero exposure to life insurance mean that for Macquarie, IAG trumps SUN. The broker has upgraded IAG to Buy.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms