Allstate Corp. (ALL, Financial) is an insurance company that offers property and casualty insurance. With a market cap of $33 billion, it is one of the larger insurance companies in the stock market. The company sells life, accident and health insurance products. Its segments include Allstate Protection, Service Businesses, Allstate Life, Allstate Benefits and Allstate Annuities. The company's insurance brands include Allstate, Encompass and Esurance.
It is one of six insurance stocks that look attractively priced today and appears poised to deliver strong total annual returns over the next five years. As a result, Allstate is one of the best insurance stocks for dividend investors.
Recent results
The company posted strong first-quarter results. Allstate reported that its property and casualty insurance premiums written totaled $8.7 billion, which was 6.9% more than premiums written during the prior-year quarter. Consolidated revenues were up 12.5% year over year to $11 billion. Additionally, the company managed to generate net investment income of $648 million during the first quarter, though this was lower than the year-ago quarter by 17.6%, primarily due to lower limited partnership valuations.
The main negative of the quarter was that catastrophe losses were elevated, combining with lower investment income to produce adjusted net income of just $776 million, down 30% from $1.1 billion. On a per-share basis, diluted earnings per share dropped to $2.30, down 25% from a year ago.
That being said, book value per common share still increased 8.5% year over year, from $58.62 to $63.59.
Overall, underwriting results remained strong, particularly in the automobile insurance business, thanks to pricing increases. Excluding catastrophe losses and reserves, the combined ratio in this sector was a very healthy 90.2%. Net earned premiums were also up 5% year over year, while retention levels held steady.
Growth outlook
The first quarter notwithstanding, Allstate is currently riding a wave of earnings growth momentum from tax cuts as well as its track record of generating strong returns on equity for investors (in 2017, return on equity was 14.6% and came in at 16.2% in 2018) and steady book value compounding on top of its dividend payouts.
This profitability growth has been driven by a trend of strong pricing increases, though, over the long term, this trend will very likely normalize. This growth performance is impressive because the insurance industry is not known as a high-growth industry. Allstate has surprisingly managed to grow its net premiums written considerably during the most recent quarters, and it continued this streak in the first quarter, up 6.9% year over year. Higher contract volumes bode well for the company’s near-term growth, which is why it is not surprising that analysts are forecasting sizeable earnings growth in 2019 as well. If catastrophe losses decline from the above-average level they were at during 2018 and the start of 2019, this would be another tailwind for Allstate’s profitability.
A headwind for growth will be declining interest rates as Allstate would benefit from rising interest rates by reinvesting insurance float more profitably. That being said, declining interest rates could prop up car purchases, thereby increasing its coverage base to some degree.
Another growth avenue is in Allstate's ancillary businesses through its entry into the subsegments of auto and homeowners insurance markets. These include businesses such as Esurance as well as recent acquisitions SquareTrade and InfoArmor.
A final way the company is achieving growth is through share repurchases, which it has pursued quite aggressively over the past decade. It is likely that share repurchases will remain a key factor for earnings per share growth going forward as well.
Dividend analysis
Allstate currently yields 2% after its most recent dividend hike of 8.7% in February, marking eight consecutive years it has grown the payout. While the company did cut its dividend during the financial crisis, it had 14 consecutive years of dividend growth before then, giving it a much longer history of showing commitment to raising its dividend. Looking ahead, the likelihood of another dividend cut during the next recession is rather unlikely thanks to the fact its dividend payout ratio is a mere 22%. As a result, we expect Allstate to join the list of Dividend Achievers in the near future. Dividend Achievers are companies with at least 10 consecutive years of dividend increases. You can see the full list of 264 Dividend Achievers here.
Valuation
The company currently trades at 10.7 times this year’s expected net earnings. Given that this is a lower multiple than both recent multiples as well as the long-term median multiple of around 11, we believe Allstate shares are marginally undervalued right now. Combined with the safe and growing dividend and expected continued mid-single-digit earnings per share growth, shares should provide a decent return over the long term at current prices.
Risks
While the dividend appears safe and Allstate is a fixture as a dominant player in the American insurance industry, investors need to keep in mind the company’s profits took a large and prolonged hit during the last financial crisis, dropping by 80% from a peak of $7.67 in 2006 to the lows reached in 2011. While the company has since recovered its profitability, it took a while as earnings per share didn’t fully recover to new highs until last year. As a result, investors should expect that the next recession will not be kind to the company either. Additionally, shifts toward autonomous driving and ride-sharing could hurt demand and profitability.
Final thoughts
Allstate is a reasonably priced dividend grower that also sports a low payout ratio and high return on equity. While the company is not recession resilient and faces potential new challenges in the future world of autonomous driving and ride-sharing, its strong competitive positioning in its core business should generate solid returns for investors for years to come.
Disclosure: No positions in any stocks mentioned.
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