SUN - Time to Buy??, page-65

By Robert Stephens - July 22, 2016 | More on: SUN

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  (ASX: SUN) is up by 7%, while the ASX has risen by 4%. Further, Suncorp has outperformed a number of its industry peers, with QBE Insurance Group Ltd (ASX: QBE) declining by 11% and AMP Limited (ASX: AMP) being down 1% year-to-date.
  
  Suncorp could keep this strong performance up over the medium term, with the following three catalysts likely to have a positive impact on its share price in my view.
  
  Strategy
  
  Suncorp’s conglomerate business structure provides excellent cross-selling opportunities in my opinion. This forms a key part of its strategy, with Suncorp not aiming to increase its 9 million customer base, but to deepen its relationships with existing customers.
  
  To do this, Suncorp is making major improvements to the accessibility and availability of its products and is investing in its digital capacity as well as in contact centres and its branch network. This will require a realignment of the company’s operating model and while this may mean challenges in the short run, I believe that the cross-selling opportunities on offer will ensure significant long term gains.
  
  Further, this breadth of product offering will help to differentiate Suncorp from its rivals and create greater customer loyalty and the potential for higher margins.
  
  Financial strength
  
  At a time when doubts persist regarding domestic and global economic growth, Suncorp’s sound financial health may help to differentiate it from other financial stocks in the eyes of nervous investors. As stated in Suncorp’s half-year results, it has a common equity tier 1 (CET1) ratio which is $506 million above its operating targets. This is equivalent to 1.25 times the Prescribed Capital Amount (PCA) and means that Suncorp’s CET1 ratio is 9.45%.
  
  Suncorp is also attempting to boost its financial health through an efficiency programme which includes an adjustment to discretionary spending. It also expects to deliver $170 million in optimisation benefits in 2018, with its brands in the process of being rationalised.
  
  Additionally, Suncorp’s general insurance segment has an intervention strategy which is seeking to lower working claims costs, while more disciplined cost management has the potential to cut its banking division’s cost-to-income ratio from the current level of 53%.
  
  Dividend prospects
  
  Although many investors may be attracted to Suncorp’s 5.5% yield, it is the likely reliability of its dividends which I feel are a key differentiator versus other stocks. Suncorp continues to target a payout ratio of between 60% and 80% of cash earnings, but given its strong financial standing it will also continue to pay out surplus capital to shareholders.
  
  In practice, this means that Suncorp could pay out the vast majority of cash earnings through a mix of dividends and special dividends. This will equate to a high yield at a time when interest rates are forecast to fall by 25 basis points within the next year and to be less than 3.5% even by 2020.