The blue chip yielding 14%

Investors buying Suncorp shares should expect a grossed-up yield of 14% over the next 13 months.

Buying Suncorp (SUN) shares before the 26th of August would grant you an effective grossed-up yield of around 14% over the next 13 months.

The company’s decision to pay a turbo-charged 30 cents per share final dividend – up 50% on last year – together with the 20 cents per share special dividend, takes the total payout to 50 cents per share for the period ending 2012-13.

Adding consensus forecasts for ordinary dividends of 76.7 cents per share in the current financial year (Suncorp has pledged a payout ratio of between 60-80%) pushes the figure to a whopping $1.26.

At current share price levels (Suncorp closed on Thursday at $12.56) this equates to an already impressive yield of 10%. Once franking credits are incorporated – of which Suncorp has an excess pool thanks to its historically low pay-outs in recent years – shareholders could receive a 14.3% return.

To give that some perspective, the S&P/ASX 200 Index is expected to return a grossed up yield of 5.7% for 2013-14.

Further, Suncorp’s yield doesn’t include the clear potential for another special dividend in 2013-14, which would be the third in as many years.

While such a high yield is clearly unsustainable over a longer period and is more a benefit of timing, it represents a valuable opportunity to harness high returns in an environment where investors are blindly chasing yield amid historically low interest rates. 

But how is Suncorp – a $16 billion blue-chip stock – able to offer its shareholders these returns?

Because it has been neglected by investors after being mired by the Global Financial Crisis, with a one-year forward price-earnings (P/E) multiple at just 12.7 times, well below its five-year average of 20.7 times and cheaper than the insurance sector’s 14.4 times.

Moreover, chief executive Patrick Snowball has been exceptional in shedding Suncorp’s bad assets – its non-core banking division –  and focusing on assets that deliver top-line growth.

As a result holding Suncorp in your portfolio might not just be a yield play, but a growth one as well.

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