The Insurance Australia Group Ltd (ASX: IAG) share price has been underperforming in 2021. Since the start of the year, the…
The post Why this broker thinks the IAG (ASX:IAG) share price is a bargain appeared first on The Motley Fool Australia. –
The Insurance Australia Group Ltd (ASX: IAG) share price has been underperforming in 2021.
Since the start of the year, the insurance giant’s shares have risen by a modest 3.5%.
This is less than half the return of the benchmark S&P/ASX 200 Index (ASX: XJO) over the period.
Is the IAG share price good value?
While the first three quarters of 2021 may have been underwhelming for the IAG share price, one leading broker expects that to change.
According to a note out of Macquarie Group Ltd (ASX: MQG) this week, its analysts have upgraded the company’s shares to an outperform rating with an improved price target of $5.70.
Based on the current IAG share price of $4.90, this implies potential upside of 16% over the next 12 months.
Another positive is that Macquarie expects the company to maintain its dividend at 20 cents per share in FY 2022. If you include this dividend yield of 4.1%, the total potential return stretches to over 20%.
What did the broker say?
Macquarie made the move on valuation grounds noting that the IAG share price is trading at a material discount to normal multiples.
In addition, the broker feels the post-Victorian earthquake share price weakness was overdone and has created a buying opportunity.
This is because Macquarie doesn’t expect IAG’s maximum event retention to be breached by the earthquake. It also suspects that the bank is over provisioned by upwards of $400 million for business interruption claims.
Macquarie feels that if this proves accurate, these funds could be returned to shareholders via a share buyback. And it won’t be long until investors find out if that is the case. The second business interruption court case is due to start in November.
All in all, the broker appears to believe this makes the IAG share price a bit of a bargain at the current level.
Should you invest $1,000 in IAG right now?
Before you consider IAG, you’ll want to hear this.
Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now… and IAG wasn’t one of them.
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*Returns as of August 16th 2021
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Insurance Australia Group Limited and Macquarie Group Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.