Insurance Australia Group (ASX:IAG) has experienced an 39% uptick in stock price through the year so far, signalling a positive trend for the insurance giant. With such a significant increase, investors are closely examining the fundamentals to understand the drivers behind this momentum, but it is clear to see the reversal over the 5 year trend, with IAG’s shares hitting highs not seen in half a decade.
One notable indicator of the company’s financial health is its Return on Equity (ROE), which stands at an impressive 15%. This figure is reached by dividing the net profit by shareholders’ equity. Not only is IAG’s ROE favorable when assessed on its own, but it also exceeds the industry average of 12%, asserting the company’s strong profitability in its market.
This high ROE seems supported by the company’s net income growth, which has been reported at 15% over the past five years. This is slightly below the industry average growth rate of 20% for the same period yet signifies a stable increase in profits for IAG. Furthermore, shareholders have benefited from the company’s track record of dividend payments, maintained consistently for at least a decade. This demonstrates IAG’s commitment to returning value to its shareholders.
The company’s payout ratio further exemplifies this commitment. With a three-year median payout ratio of 54%, there are expectations for it to increase to 76% in the coming three years. However, the projected rise in payout ratio does not appear to affect the ROE significantly, suggesting the company can maintain profitability while increasing the dividends it pays out to shareholders.
Nevertheless, there are areas for investors to be cautious about. Analysts expect a slowdown in earnings growth for IAG in the near future. Moreover, the company’s current reinvestment rate seems relatively low, which might limit the benefits that can be reaped from its high ROE for investors. The consensus target in the low $7.20 range remains slightly behind the current price action, with analysts targets not keeping pace with the IAG price growth over recent months.
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IAG’s strong fundamentals, highlighted by solid ROE and consistent dividend payments, have undoubtedly contributed to the stock’s recent uptrend. Nonetheless, with forecasts of slower growth and concerns over reinvestment, the company’s future performance warrants careful consideration. Investors should take a balanced view, analyzing both the historical data and the potential market scenarios to make informed decisions.
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