The Suncorp Group Ltd (ASX: SUN) share price is in focus after reporting its FY21 result, and announcing a special dividend with a share buyback.
Suncorp’s FY21 result
The insurance and banking giant reported a much stronger result than FY20.
Suncorp’s total cash earnings increased by 42.1% to $1.06 billion, whilst profit after tax from ongoing operations increased 33% to $1.17 billion.
Total group net profit only rose 13.1%, to $1.03 billion, because last year included profit made by operations no longer in the business (being the Capital SMART and ACM Parts businesses).
Insurance
The insurance profit after tax rose 42.4% to $547 million. Gross written premium (GWP) rose by 5.5% to $8.79 billion. Investment income went up 25.8% to $390 million.
Suncorp explained that net profit grew here as a result of insurance growth, higher investment returns and increased prior year reserve releases. However, there was increased spending on strategic initiatives and higher natural hazard costs.
The COVID-19 impact was mostly neutral in this result, with reduced motor claims offset by additional provisions to cover uncertainty about business interruption claims.
Banking
Suncorp’s banking profit went up 69% to $419 million.
This was driven by a 13 basis point (0.13%) increase of the net interest margin (NIM) to 2.07% and a net impairment release.
NIM describes the cost of a bank’s funding (such as deposits), compared to the rate it’s lending that money to borrowers at (like a mortgage). The NIM increased because of growth in deposits and lower benchmark interest rates.
Profit before impairment losses on financial assets increased 4.6% to $550 million, so underlying profit didn’t change that much. A net impairment release of $49 million reflected a $60 million reduction in the collective provision (for loans going bad) due to the improvement in economic conditions since the outbreak of COVID-19.
New Zealand
Suncorp said that its New Zealand profit after tax was down 17% to NZ$215 million, with general insurance profit falling 19.2%.
The business said gross written premium grew 9.2%, led by the performance in the direct AA insurance channel.
However, net incurred claims grew by 17.7% because of higher natural hazard costs, with the full year allowance exceeded by $27 million.
Suncorp shareholder returns
The business announced that it was increasing its FY21 ordinary dividend by 83.3% to $0.66 per share. That represents a payout ratio of 79.3% of cash earnings.
Suncorp’s board also decided to declare a special fully franked dividend of 8 cents per share as well as announcing an on-market buyback of up to $250 million. That was a result of Suncorp’s strong balance sheet and confidence in the company’s outlook.
Summary thoughts on Suncorp and the share price
It’s good to see that Suncorp’s profit has rebounded so strongly. Shareholders will probably be pleased with the elevated returns as well.
However, insurance businesses are volatile with both recessions and big storms causing volatility. There are other ASX dividend shares I’d rather be looking at which can be more consistent.
