What Risks Do IAG’s 5.9% Yield Capital Notes 3 Pose to Investors?
Insurance Australia Group Limited (IAG) has announced a quarterly distribution of AUD 1.4715 per security for its Capital Notes 3, reflecting a 5.9% annualised yield with partial franking.
- AUD 1.4715 distribution per Capital Note 3 security
- Distribution period ends 14 September 2025
- 5.9020% annualised distribution rate
- 40% of distribution is franked
- Payment scheduled for 15 September 2025
IAG’s Latest Distribution Announcement
Insurance Australia Group Limited (IAG) has confirmed a quarterly distribution payment of AUD 1.4715 per security for its Capital Notes 3 (ASX code – IAGPF). This payment corresponds to the quarter ending 14 September 2025, with the ex-date set for 2 September and the record date on 3 September. Investors can expect the payment to be made on 15 September 2025.
Understanding the Distribution Rate and Franking
The announced distribution equates to an annualised yield of 5.9020%, which is derived from a margin of 3.20% added to the 3-month Bank Bill Swap Rate (BBSW) of 3.7138%. This blend reflects the fixed margin set at the time of the Capital Notes 3 issuance and the prevailing short-term interest rate benchmark. Notably, 40% of the distribution is franked, meaning it carries a tax credit reflecting corporate tax already paid by IAG, which can be advantageous for Australian resident investors.
Capital Notes 3 – A Closer Look
Capital Notes 3 are perpetual, non-cumulative securities issued by IAG, designed to provide investors with a steady income stream linked to short-term interest rates plus a fixed margin. The partial franking of distributions adds a layer of tax efficiency, though 60% of the distribution remains unfranked. The notes’ terms, including the margin and calculation of the distribution rate, were established at issuance and remain unchanged, providing investors with a degree of predictability.
Implications for Investors and Market Context
This distribution announcement aligns with IAG’s ongoing capital management strategy, offering income-focused investors a competitive yield in the current interest rate environment. The 5.9% annualised rate is attractive relative to many fixed income alternatives, especially given the partial franking credits. However, as perpetual notes, these securities carry certain risks, including the non-cumulative nature of distributions and the potential for changes in interest rates affecting future payments.
Looking Ahead
Investors will be watching subsequent distributions closely to gauge consistency and any shifts in the underlying reference rates. The stability of IAG’s credit profile and broader market conditions will also influence the attractiveness of these capital notes going forward.
Bottom Line?
IAG’s steady distribution on Capital Notes 3 underscores its commitment to delivering income, but investors should monitor interest rate trends and credit conditions closely.
Questions in the middle?
- Will future distributions maintain the current margin amid changing interest rates?
- How might shifts in IAG’s credit rating impact the attractiveness of Capital Notes 3?
- What are the implications for investors if the partial franking percentage changes?
