IAG – Time to Sell Call Options
We were buyers of IAG from $5.50 to $5.75 and with stock now trading at our price target of $6.00+, we look to sell call options to boost the return.
Insurance Group Australia (IAG)
Insurance Australia Group (IAG) reported a 4.3% drop in first-half profits to $446 million, which was down from $466 million from the previous corresponding period but slightly higher than the street’s expectations.
Amid an atmosphere of increased claim pressures, Australia’s largest insurer by market share announced its gross written premium grew by 4.7% to $5.8 billion.
IAG declared an interim, fully franked, dividend of 13 cents per share to be paid on March 30th. This dividend represents a cash payout ratio of 64.3 %.
IAG – Bounces Off Support
We highlighted in this month’s video report that IAG would likely find support at $5.50. The stock has since traded down and tested the $5.50 range and buyers have pushed the stock back to $5.80.
We see a place for IAG in portfolios based on FY17 earnings of $900m, EPS $0.36 and DPS of $0.32 which places the stock on a forward yield of 5.5%. We compliment this with a tight covered call option to increase the cash flow to 12% on an annualised basis.
$6.00 remains resistance and we don’t see the stock trading above this level in the short term.
Note: IAG has implemented an optimisation program that will reduce gross operating costs by an annual run rate of at least 10%, or $250m by the end of FY19.
Algo Signal Review
The algo engine has triggered a number of ASX signals in the last 48 hours. CSL has sold-off and is worth watching, the other theme is the potential short in the insurance names IAG & SUN.
We’ll be looking at these trades next week.
Algo Signal – IAG Sell
The algo engine has triggered a sell signal in IAG. We consider this trade in the context of a tight stop loss on a break back above $5.75
Insurance Australia FY16 Earnings Result
IAG.ASX reported FY16 cash NPAT of $867m and EPS of $0.36 and a final dividend of $0.13
FY17 guidance is for slightly softer insurance margins and DPS of $0.28 placing stock on a forward yield of 5%.
We’re comfortable buying IAG.ASX on a pullback to $5.50
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