QBE Raises Dividends 35%, but Drops the Ball on Profits

That’s right, that heading isn’t a typo. QBE Insurance Group raised dividends by 35%, to 50 cents per share. QBE is one of Australia’s largest insurers, providing cover on everything from car to travel insurance. Its ability to pay such high dividends was underpinned by ‘underwriting result at the better end and an insurance profit margin towards the middle of our target ranges,’ according to CEO, John Neal.

But it’s not all sunshine and rainbows for QBE. Their NPAT (net profit after tax) dropped by 7%, to $687 million. However, on a cash basis, QBE actually increase NPAT by 7%. Funny how accounting works, isn’t it?

Neal also highlighted: ‘[excluding QBE’s] sold Argentine workers’ compensation business and the one-off impact of other non-core asset sales (the basis upon which we published our 2015 performance targets) was $807 million, up 1% on the prior year but up 12% on a constant currency basis.

I think it’s safe to say investors don’t really mind small profit changes as long as dividends remain the focal point. This morning, QBE share jumped as much as 13.66%, to $11.81 per share. However, QBE has a long way to go in making up for their share price drops in the year ahead.

Shares are still down 9.3% for the year. If the attitude towards financial institutions doesn’t improve, then QBE might as well say goodbye to today’s gains.

QBE Share Price

Source: Yahoo Finance

However, a decline for this year is somewhat expected. QBE have had to face a number of challenges last year that would’ve most likely carried over into 2016. As Neal highlights:

It is noteworthy that we produced our result in the face of a number of headwinds, including challenging insurance pricing and investment markets, a significantly stronger US dollar and continued low interest rates. Moreover, the result included substantial investment in infrastructure, technology and people.

QBE has also been removing poor performing businesses off their books. Their transformation, if you want to call it that, has actually been progressing for the last three years. Over this time period QBE ‘has generated cost savings approaching $400 million including a further $126 million of incremental benefits in 2015.

QBE has said that they would like to reduce costs by a further US$150 million. The big insurer is hoping to improve their expense ratio for 2016. However, the golden egg for investors remains dividends.

Back in 2013, QBE cut dividends to free up extra capital to improve the business. Shareholders were disgruntled, and that’s putting it mildly. Yet those who stuck it out are not reaping the benefits of QBE’s actions.

Härje Ronngard,

Junior Analyst, Money Morning

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