Picking One Winner Among Three Top Insurance Companies
James is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Warren Buffett has given numerous reasons over the years as to why insurance is one of his favorite industries. Stability, predictability, continuous cash flow, and large cash reserves are just a few. In the past this seemingly boring sector has produced some very exciting returns. With balance sheets looking solid, this group could be poised to do very well in 2013. But let's get specific and take a look at some of the leading insurers to determine if they are worthy of a buy rating.
Aflac (NYSE: AFL) is the largest supplier of supplemental health insurance. This Columbus, Georgia company recently reported earnings that failed to impress the market. Perhaps that's because the market was expecting a bit too much? Net income came in at $581 million ($1.24/share), which was a notable gain over the previous year at $538 million ($1.15/share). While these numbers were in line with expectations, the stock has suffered a near 10% drop. This recent decline has led to valuations (Figure 1) that could be attractive to the long term value investor.
|Avg. 5 Year Dividend Growth Rate||30.46%||7.36%|
|Avg. 5 Year Sales Growth Rate||10.52%||3.26%|
|Avg. 5 Year Net Profit Margin||9.60%||6.30%|
|Avg. 5 Year Return on Investment||15.90%||7.90%|
What the numbers show is an undervalued company that has historically outperformed the industry in key metrics. Over a five year range we have seen this company rally to P/E's as high as 26 on good news or favorable earnings reports. The long term risk reward is hard to ignore based on that figure alone.
However, a note of caution. It looks as though an increasing amount of their business is being done in Japan. With the Yen set to weaken, look for the currency exchange rates to have a negative impact. But then again if Japan does inflate its way to success as many predict they will do in 2013 then the increase in business should more than offset the minor percentage declines in the currency exchanges. In the most recent quarter they reported a 10.5% revenue increase for Japan, but a 4.4% negative currency exchange rate curbed investor enthusiasm. I personally have a positive outlook on that trade-off.
Allstate (NYSE: ALL) is a leading property, causality, life, and retirement/investment business. Established in 1931, during the height of The Great Depression, this Northbrook, Illinois company has been a cornerstone of the American experience as long as many of us have been alive. But does it deserve to be a cornerstone in your portfolio?
Over the last 52 weeks Allstate has seen a 45% surge in stock price. Even with that kind of a run some might still argue that upside potential remains given:
1). A $43/share book value for a stock currently trading around $45.
2). A Price/Sales of 0.65 is one of the most attractive I found in the industry.
3). PEG Ratio of 1.08 is pointing to great things in terms of future growth expectations.
Recently Allstate reported earnings that handily beat the consensus estimates on both the top and bottom lines. Highlights of the call include a dividend increase and a $1 billion authorized stock buyback that follows a $1.5 billion buyback from last year. Looking over the report it appears that they are increasing their business in several key ways, most noticeably the net written premiums.
There are a few things I don't like. Margins and catastrophe claims had negative impacts. The margin issue seems to be ongoing. The 5 year average sales growth is still negative, however, with recent positive sales increases they look to be changing that long term indicator. One final criticism would be the meager 1.90% yield that comes at the expense of a low 17% payout ratio. The extra $0.03 they just announced is hardly enough to keep me interested. Looking at their history of raising dividends I'm less than impressed. Perhaps it's time for Allstate to start putting more of the investors money back in their good hands?
THE TRAVELERS GROUP
Based in New York, NY The Travelers Group (NYSE: TRV) property and casualty insurer operates primarily in the United States. Over the last year this stock has seen an impressive 33% run to the upside. But can that run continue? Let's take a look at some key figures (Figure 2) to see if there is still some value left after those great returns. For comparison I also included the figures from Aflac and Allstate. Winners are in bold.
|Valuation||The Travelers Group||Allstate||Aflac||Industry|
|Avg. 5 Year Dividend Growth Rate||8.91%||3.10%||30.46%||7.36%|
|Avg. 5 Year Sales Growth Rate||0.23%||-0.55%||10.52%||3.26%|
|Avg. 5 Year Net Profit Margin||10.90%||2.00%||9.60%||6.30%|
|Avg. 5 Year Return On Investment||9.90%||4.70%||15.90%||
A good insurance company deserves a place in every long term portfolio. The continuous cash flow is a reliable source for growth and dividend payments. As with any industry it is wise to maximize your investing dollar by doing some research to find the best of breed. While I'm a huge fan of Allstate there are some red flags. The Travelers Group presents a compelling buying opportunity, however, Aflac is the clear winner. Value and growth can co-exist as Aflac demonstrates. Great fundamentals, solid value, and attractive earnings forecasts are all leading me to pick Aflac as my winner in the battle of the top insurers.
James does not own shares in any companies mentioned. The Motley Fool recommends Aflac. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!