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Question:
Under this study, an analysis is done on the share valuation and portfolio planning of Insurance Australia Group Limited (IAG) through models. The impact of market influence on the company and value of the shares is also discussed.
Portfolio planning is a strategy that helps to calculate the general purpose and constrains in a personal or corporate portfolio. It is a type of investment strategy. The buying and selling of investments is determined through portfolio planning. Portfolio management is a management through which the companies can take decisions for the investments. It helps companies and individuals to allocate their assets and balance between the risk factors involve in the investment. This management is all about to calculate the weakness, strengths, opportunities and threats in selection of investment. It is an advisory tool helps to choose between the debt or equity, international or domestic, safety or growth, and many other factors. The main aim is to maximise the returns and minimise the risk on the investments.
Each share has some value that is printed in front of it, which is termed as ‘par value’ or ‘face value of shares’. The face value is decided in the memorandum of association of the company to which the shares belong to or given by the promoters of the same company. Besides face value, the share has a market value also which is different from the face value. It is determined through the supply and demand of that share in the stock market. The market value is many times affected by the fear, actions, opinions, guess, etc. of the investors. Hence, the market price is not the true price of a share. Under this situation, the need for Valuation of Shares is arises. The valuation can be one either by considering the earnings of a company or through net assets. It depends on the investment done by the inventors.
Insurance Australia Group Limited (IAG) is one of the most reputed and trusted insurance company across the world. It was established in 1925 when NRMA initiated giving insurance to its members. IAG is providing insurance to millions of people of Australia for almost 160 years. It is more (Lindgreen, 2010) effective in the countries like Australia and Asia. It has its operations not only in Australia, but also in New Zealand, Thailand, Indonesia, and Vietnam. The company has more than 15000 employees working across the word. It has also general insurance joint ventures in India, china and Malaysia (AmGeneral Insurance, 2016).
It is a company that underwrites a premium of approx AUD $11.4 billion per annum selling its insurance to many famous brands. It has a wide range of general insurance products that provides protection to many households, lives, businesses, vehicles, of millions of customers (Gorgon, 2014).
It has a 49% interest in the general insurance in many companies like AmGeneral Insurance Berhad (AmGeneral), AmBank Group, etc. who is subsidiary trades of AmAssurance and Kurnia brands.
Its tagline is: “We help make your world a safer place”.
It serves not only the customers but also its partners, employees, shareholders, communities, etc. across Australia, New Zealand or Asia. It believes to have a sustainable development in the business and always try to bring consistent returns for the shareholders. The vision of the company is to become Asia Pacific’s most inventive, loved and successful insurer (Gittins and Forsyth, 2009).
Economy: The domestic and global economies directly or indirectly influence the performance and working of IAG. Most of (Tóth, 2015) the commercial enterprises eventually stuck due to the fluctuations take place in the market like- politics, policies, and fluctuations in currency, etc.
Finance: Finance is one of the major issue due to which many companies faced a downturn. The solvency of big banks and financial institutions is also a result of mismanagement of finance. This will effect in continuity of business. Many financial terms like credit availability, loans, investment, etc. influence the firms (O’Neill, 2016).
Weather: Weather is considered as a natural factor that influences the firm. It is uncontrollable factor due to which the organizations face a fall in its productivity.
Laws: The central, state and federal laws passed by government create a direct impact on IAG if they do not follow or outlawed. Government regulations for the environment and society are not in the control of the company and influence directly on the same (Pratt, 2014).
Customer base: The needs and wants of the customers can change in a very short period of time which directly influence on the demand for the products and services given IAG. Changes in the taste and preferences, trends, cultural changes, etc. may affect.
Scandals: This is the most negative (Duke, Nneji and S. E., 2015) impact that one company has. Scandals results in negative price of the shares in the markets. The stock prices of the company falls down that result in worthless stock prices.
Politics: Politics is a factor that directly influences the business. As we know, that the stock market is managed by the government (Davidson and Tippett, 2012) of the country and they are the one who make policies and regulations according to them. It will affect the business up to a great extent.
Supply and demand: It is the most important factors on which the value of shares depends. When the price of a share is low, then there is more demand of it. But it will change, when the price is high. Sometimes, the investors pay more for successful stocks and shares. Sweet spot is a situation when there is equality in demand and supply of shares, but it will not remain same for a long period. The battle will continue with the ups and downs in the price.
They shared a value which is fundamentals and relates to the way they do their business.
They believe that being a leading company in general insurance, their role is not only an insurance provider but also to think beyond it.
Its aim is to build strong and confident relations with its clients and customers.
In this way, IAG’s share value increased day by day.
NTA backing: It refers to the net tangible and (Andriosopoulos and Lasfer, 2015) physical assets owned by the shareholders of the organization. It helps to calculate the value of asset per share.
NTA = (A-I-L)/ N
A= Total assets
I= Intangible assets
L= Total liability
N= Total no. of security
Dividend discount model (DDN): It is a model to value the price of the stock by using discounting and dividends. The value obtained from this method is compared than the value at which the current trading of shares take place then it represents that the stock is undervalued.
Value of stock = Dividend per share
Discount rate – dividend growth rate
Capital assets pricing model (capm): This method is used by IAG to calculate the expected returns on the stock and asset. It is a model that defines the connection between the expected returns from the project and risk involved in it. The company is using this method to price the security, to develop returns, and also to calculate the cost of capital.
Calculation of expected returns of stock and asset is:
Capitalization of earnings: It is a method used by IAG, which helps to determine the value of assets. It calculates the value of Net Present Value (NPV) of the future profits of the company and its cash flows. It is calculated by taking the earnings estimate of the company and also the future earnings. Then divide the value by capitalization rate (cap rate. This approach is also known as income valuation approach that figure out the actual value of the business. It looks after the current cash flow, the expected value, and the annual rate of the return of IAG (PESTLEanalysis Contributor, 2015).
Value = Earnings in the future years
d-g
Where,
d= discount rate
g= growth rate
CAPM- Diversification of investments help IAG to cope up with the risk but still it’s impossible to cover 100% risk from the investments. Investors need a good rate of return that can compensate them to take risk. This model helps IAG to determine the risk in the investment and also the rate of return that is expected by the company. Capm is one of the most accurate and easy model to calculate risk and rate of return on the investment. It helps IAG up to a great extent. It not helps to calculate systematic risk but also unsystematic risk. It provides risk free rate to IAG (Mcclure, 2016).
NTA- This model helps IAG to calculate, understand and use net tangible asset per share (NTA/ps). It assists the company whether the price of the shares is overvalued, undervalued or correct value. It also helps to determine (Jarrow, 2010) the fair price of the shares, case scenario of any investment, triggers of the company to sell out the shares, whether the price of the share reflects the correct net assets of the company, the money come back if it I liquidated, time to exit the investments, etc. (Freedman, 2016).
DDN- This method is useful for big companies like AIG. It helps to calculate the growth in dividend of a company. It also (Duffy, 2015) helps to calculate the outputs for the given inputs. It is the most straight forward method that helps IAG to calculate the price of the dividend paying stock.
Capitalization of earnings- It helps IAG by reduction in the fluctuations in income. It gives assistance in tax saving. This model helps to manage the credit worthiness of IAG. To improve the financial ratios of the company, this method is proved best out of all (Ray, 2016).
There are many factors that indirectly or directly influence the firm and its performance. These factors can be external or internal, macro or micro, international or national, legal or illegal, etc. the major factor that influenced IAG is policies and laws of government. These policies restrain the company to expand its business from Australia to some other parts of the world. Though, these factors are very effective in nature, but IAG is an organization that spreads the threats from such factors. IAG take such factors as a challenge and try not to get affected by the same (Thomas and Gup, 2010).
But many times, this company also faced problems due to these factors. Some factors are not in the control of anyone like disaster, weather, etc. These factors are unavoidable by companies as well as individuals. Some factor like legal restrictions and regulations are also result as barrier to IAG.
The investors should invest their money in this company as it is one of the largest insurance companies of Australia. It is a good opportunity for the investors of Australia. Its market capitalisation is $ 13 billion. It is a good company for dividend-seeking investors as the distribution policies for (Arthur, 2015) dividend of this company is very good. Investors can also invest in this company because it has a strong financial position. The income of the company is also very attractive which attracts investors. It maintains its dividend policy for the shareholders.
The price of the share is increasing that why it is advisable to the investors to hold the company’s share. The targets of the company will also be changed from 5.64-6.00 this year. It is a positive sign to all the investors as the business will expand in future (Slee, 2011).
Through this study, the learners can have a thorough knowledge about Insurance Australia group limited. The company is one of the renowned companies of Australia. They will also learn about the various model helps to calculate the value of shares, assets, liabilities, dividend, etc. there is a description about the factors that influence Australia insurance group limited, its share price, stock markets, performance of the company, etc. it is also mentioned that these factors result in whether direct impact or indirect impact on the company.. The extent of such factors is also mentioned to give a deep knowledge about the same. The study also carries some recommendations that can help the investors to take decision that whether they should invest their money in IAG ltd or not.
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Andriosopoulos, D. and Lasfer, M. (2015). The market valuation of share repurchases in Europe. Journal of Banking & Finance, 55, pp.327-339.
Arthur, R. (2015). Driving under the influence…..”Of social factors”. Miscellanea Geographica, 19(3).
Davidson, I. and Tippett, M. (2012). Principles of equity valuation. London: Routledge.
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Duke, S., Nneji, I. and S. E., N. (2015). Impact of Dividend Policy on Share Price Valuation in Nigerian Banks. ABR, 3(1).
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Jarrow, R. (2010). Active Portfolio Management and Positive Alphas: Fact or Fantasy ?. The Journal of Portfolio Management, 36(4), pp.17-22.
Lindgreen, A. (2010). Market orientation. Farnham, Surrey, England: Gower.
Mcclure, B., (2016). The capital asset pricing model: An overview, [Online], Accessed on: 16 September 2016, Available at: http://www.investopedia.com/articles/06/capm.asp
O’Neill, S., (2016). Is it time to busy Insurance Australia Group LTD shares?, [Online], Accessed on: 16 September 2016, Available at: http://www.fool.com.au/2016/03/17/is-it-time-to-buy-insurance-australia-group-ltd/
PESTLEanalysis Contributor, (2015). Internal factors that may affect the business organisation, [Online], Accessed on: 16 September 2016, Available at: http://pestleanalysis.com/internal-factors-affect-business-organization/
Pratt, J. (2014). Energy Capitals. University of Pittsburgh Press.
Ray, L., (2016).Seven External Factors of Business, [Online], Accessed on: 16 September 2016, Available at: http://smallbusiness.chron.com/seven-external-factors-business-21960.html
Slee, R. (2011). Private capital markets. Hoboken, N.J.: Wiley.
Thomas, R. and Gup, B. (2010). The valuation handbook. Hoboken, N.J.: Wiley.
Tóth, G. (2015). IAG Newsletter. J Geod, 89(8), pp.839-842.
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