Insurance Australia Group's strong earnings momentum, "supercharged dividend" and excellent defensive qualities demand a further re-rating of the stock, according to at least one broker.
Morgan Stanley lifted its one-year forward price target on the stock to $6.20 from $5.80 and reiterated its "overweight" recommendation on the grounds that IAG is well placed to deliver stronger margin guidance for 2013-14 – between 12-14% above the previous year's estimated 11-13% – amid rising economic uncertainty and market volatility.
"IAG's defensive qualities shine through with the insurance cycle broadly uncorrelated to the economic cycle," Morgan Stanley said.
The broker said that while the insurer's premium rate increases may be slowing, margins will continue to expand into 2014-15 thanks to lower reinsurance costs and claims inflation.
What also stands out for Morgan Stanley is IAG's second-half dividend yield. The broker has lifted its estimate to six cents per share and believes there is room for dividends to rise even further in the periods ahead.