Bill Nygren Comments on AON Plc
AON PLC (AON-$47)
As one of only three insurance brokers with a global platform, AON (AON)’s market position should allow the company to directly benefit from global economic growth. AON stock surpassed $50 in 2007 when it earned just over $2 per share. In 2012, after a restructuring that improved margins, AON is expected to earn over $4 per share after adding back goodwill amortization from recent acquisitions. Despite the growth in earnings and the potential for further margin improvement, the stock has been stagnant. As a result, the P/E ratio for AON has fallen from 25 times in 2007 to 11 times now, slightly less than the P/E ratio for the S&P 500. Unlike the insurance business, insurance brokerage is not capital intensive. Therefore, we believe AON has the ability to return most of its earnings to shareholders through share repurchases and dividends. An additional feature we value is AON’s potential to generate meaningful interest income. AON, as a fiduciary, holds its clients’ capital for a short period of time before it is turned over to the insurance companies. With today’s low short-term interest rates, there is little opportunity to generate returns on that capital. We don’t believe short-term rates will stay low forever and like getting the option for more rapid earnings growth when rates increase.