After enduring four years of falling or static dividends, shareholders in Insurance Australia Group could finally be in line for a significant one-off payout to help boost investment returns from one of the country’s biggest domestic insurers.
IAG is sitting on about $900 million of excess capital, and analysts suggest that as much as $375 million could be returned to investors through a special dividend, which would be the first such payment since the 12.5¢-a-share payment in 2006. A payout of that size would be the equivalent of 18¢ a share and would go some way to restoring IAG’s battered reputation for dividend returns among its legion of retail shareholders.
From a high of 29.5¢ in combined interim and final dividends in the successive years of 2006 and 2007, investors saw the payout cut in 2008 and then more than halved – to just 10¢ – last year, with only a small rise a year later.
Falling profits in Australia and losses in Britain caused by the group’s ill-fated expansion there and huge weather-related insurance claims substantially reduced IAG’s pool of bottom-line earnings and its ability to maintain its dividends at its previously high levels.
The company expects a better 12 months for its 2011 year ending on June 30, notwithstanding any catastrophic weather-related events that could hold back its expected profit growth. Latest forecasts suggest that IAG will turn in a full-year profit of $706 million, which, if met, could allow for an annual dividend payment totalling 21¢ a share. That would be equal to 60 per cent of the company’s earnings – right in the middle of its declared 50 to 70 per cent payout range.
In a review of IAG’s finances, the insurance research team at Deutsche Bank estimates that with $909 million of capital over and above its minimum financial commitments required by the industry’s regulator, the level of post-dividend retained profits would allow the company room for another capital return.
An option would be a share buy-back but Deutsche suggests that would only increase earnings per share by a maximum of 3 per cent over the next three years, while a special dividend payment could boost the value of its share price by 23¢.
The stock has been steadily recovering from its year-low of $3.28, and closed on Friday at $3.81. But it is yet to break through the $4 level – a price last seen in March.
A special dividend is also considered more likely because of the availability of franking credits. Deutsche estimates that even with a $345 million one-off payment, IAG would still be able to fully frank another $1 billion of dividends after its financial year ends in June.
Source : The Sydney Morning Herald
