There are several reasons to consider Insurance Australia Group Ltd (ASX: IAG) shares for your watchlist.
Insurance Australia Group is Australia’s largest insurance business, its direct heritage dates back to 1920. Its businesses underwrite over $11.4 billion of premium per annum, selling insurance under many brands, including: NRMA Insurance, CGU, SGIO, SGIC, Swann Insurance and WFI (Australia); and NZI, State, AMI and Lumley Insurance (New Zealand).
3 reasons to consider IAG for your watchlist
- Warren Buffett approved: Back in 2015 IAG formed a strategic partnership with Berkshire Hathaway, the company which legendary investor Warren Buffett is Chairman & CEO. As part of the insurance partnership, Berkshire Hathaway took a (at the time) 3.7% stake of IAG via a $500 million placement. A company that attracts Warren Buffet could be attractive to us regular investors
- Growing profit margins: One of the key factors that help a share beat the market is growing profit margins. This allows the profit (and dividend) to grow at a faster pace than revenue. In FY18, IAG reported that its underlying margin increased by 1.7% to 14.1%, it also said that the reported margin increased by 2.8% to 18.3%. This was one of the main factors that helped the cash earnings grow by 4.5% and the cash return on equity (ROE) increase by 0.4% to 15.6%.
- Attractive dividend: In this era of low interest rates a good dividend yield can be very useful for income seekers. IAG offers a fully franked 5% dividend yield, or 7% including the franking credits. The dividend has been fairly stable in recent years. It had a 79.5% dividend payout ratio of cash earnings in FY18, which allowed it to re-invest 20% of profit back into the business for further growth.
Is IAG a buy?
I’m not calling IAG a clear buy at this stage. Storms are becoming more expensive to insure for IAG and Suncorp Group Ltd (ASX: IAG). And the investment portfolio float is falling in value as asset prices fall and the Royal Commission may recommend additional regulations for insurance companies which could hurt IAG’s bottom line.
In my opinion, there are other shares on the ASX that have easier routes to profit growth over the next two or so years, such as the proven shares in the free report below.
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