There's much to like about Allstate Corp. (ALL, Financial) today, with reasonable financial strength, good profitability and a discounted price. Is it too good to be true?
A week or two ago, I might have ventured a "no," but that was before Hurricane Laura came pounding ashore in Louisiana and Texas. We're also told there's a possibility of more storms like it before hurricane season ends.
According the insurance rating agency A.M. Best, the storm could cause "meaningful" losses for property and casualty insurers and reinsurers. So far, Allstate has not announced how it will be affected.
However, it did let us know that Covid-19 had not yet been a problem for its investors in the headline to the second-quarter earnings release: "Allstate Quickly Adapts to Pandemic and Delivers Excellent Operating Results."
Allstate was founded as the insurance division of Sears, Roebuck in 1931, and then spun off as an independent entity in 1993. Its products are also sold in Canada, and it has an online brand "esurance." This graphic shows how the company is structured to pursue four different consumer segments:
All of which leads us to ask if there is enough diversity in this company to make it a good long-term investment. To check, we will review its fundamentals, its dividend and buyback practices and ownership among the investing gurus.
Financial strength
Insurance companies normally have two sources of income: premiums paid for policies and interest and capital gains from their investment portfolio. Since policyholders normally pay in advance, before making claims, if any, those funds provide an investment source of revenue to the company. It is one of the reasons why Warren Buffett (Trades, Portfolio) likes insurance companies so much.
While premiums and investment income are Allstate's main source of revenue, it also uses long-term debt to finance its operations. The amount of debt has been increasing:
The high number for interest coverage, 18.39, tells us, though, that debt is not a problem. Investors will also be assured by the high Piotroski F-Score.
What may be unsettling is the ROIC vs WACC ratio. Because the return on invested capital is less than the weighted average cost of capital, it is possible the company is destroying capital.
Profitability
As we see from the table, there's a lot of green, and that indicates Allstate is doing well on profitability metrics, with one exception.
We also note that all three growth metrics are strong, with revenue growing at an average of just over 10% per year over the past three years. Even more encouraging are the growth rates for profitability (Ebitda and earnings per share), which indicate the company is becoming more efficient.
Not included on the chart is any reference to the operating or combined ratio, two measures by which insurance companies' profitability is assessed. The property-liability combined ratio for the second quarter of 2020 was 89.8% (a ratio below 100% indicates the company is making money, and a ratio above that indicates losses are occurring).
Getting back to the ROIC versus WACC ratio, we can give it less weight, now that we see a positive combined ratio.
Valuation
A score of 7 out of 10 indicates there may be a bargain available.
The price-earnings ratio suggests the same. At 7.03, it is well below the 10-year median of 12.68.
The PEG ratio (price-earnings ratio divided by the five-year Ebitda growth rate) is 0.64. Because it is below 1.00, the stock is considered undervalued.
And the discounted cash flow calculator, based on a 3.5 out 5 predictability score, suggests the current price is at a deep discount to the fair or intrinsic value:
Dividends and buybacks
Based on the current and depressed price, Allstate pays a dividend of 2.25%. That's slightly above the S&P 500 average and better than we can expect if the share price rebounds:
The dividend payout ratio is just 16%, so it is very safe and leaves significant sums available for growth.
Given the three-year dividend growth rate, averaging 14.9%, there is potential for a much higher dividend. Indeed, the five-year yield on cost at 4.11% is nearly double the current yield.
The forward dividend yield comes in slightly above the trailing 12-month yield. That's because Allstate increased its quarterly dividend from 50 cents to 54 cents in July.
Turning to the share repurchase side, we see the three-year average share buyback ratio is 4.5, which is quite ambitious. Buybacks have allowed it to reduce its share count by 39% over the past decade:
Gurus
Allstate is owned by 14 of the gurus followed by GuruFocus. At the end of the second quarter, Andreas Halvorsen (Trades, Portfolio) of Viking Global Investors had the biggest position with 1,769,570 shares, good for a 0.57% stake in the insurer. This is a new holding for the firm.
Pioneer Investments (Trades, Portfolio) had the second-largest stake, at 508,610 shares, after reducing it by 0.09%. The third-largest holding belonged to Robert Bruce (Trades, Portfolio) of Bruce & Co. with 309,800 shares; his position was unchanged during the quarter and represented 7.01% of the firm's capital.
Conclusion
There may be heavy payouts ahead as we wind through the 2020 hurricane season, but Allstate should be able to weather the storm, as it has for the past 89 years.
As we've seen, the insurer is financially strong, profitable and now available at a bargain price. This should make it a good short-list candidate for some investors.
Growth investors might see the current dip as an opportunity to get started at a discounted price and hold for future capital gains. Value investors will appreciate the deep discount, but do a little more analysis to determine if the debt situation is feasible. Income investors will need to study Allstate further to determine if the dividend growth rate is likely to continue growing as quickly as it has over the past three years.
Disclosure: I do not own shares in any companies named in this article.
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