Allstate Corporation ALL is poised to grow on the back of its well-performing property and liability segment. A number of initiatives undertaken by the company to improve profitability in the auto segment will also drive long-term growth. A strong balance sheet and intelligent capital management are other positives. The acquisition of SquareTrade, PlumChoice and InfoArmor will provide diversification benefits.
Allstate’s property and liability business continues to be profitable owing to pricing discipline and a strong claims management. It is also benefiting from past acquisitions and growth in the emerging businesses, evident from a consistent increase in earned written for the past many years. The trend continued in the first quarter of 2019 with the same up 6.2% year over year. We expect the segment to continue adding to its top line, given a number of strategic initiatives taken for growth, such as product enhancements and changes in business mix to focus on those that command a high return on equity.
Allstate is rapidly growing its Service business, which provides diversification benefits in the industry and helps it stay ahead of other companies such as W.R. Berkley Corp. WRB, Alleghany Corp. Y and Hallmark Financial Services, Inc. HALL in the same space.
In this vein, the company acquired SquareTrade in 2017, a provider of protection plans for mobile phones, consumer electronics and appliances. Premium Written from SquareTrade increased 81% in 2018. It also acquired PlumChoice in 2018, a leading provider of cloud and technical support services to consumers and small businesses. These buyouts will expand the company’s Service business, which posted revenue growth of 27% in 2018.
Moreover, after suffering from declining income in its investment portfolio for the past many years due to market volatility and low interest rates, the company is gradually gaining ground. Net investment income rose 11.8% in 2017 and 6.3% in 2018. The company has also lowered its exposure to growth-sensitive assets, which is likely to improve its investment portfolio’s risk profile.
The company’s cash flow has been increasing over the years. Management’s proactive risk mitigation and return optimization programs continue to enhance operating cash flow and shareholder value.
Allstate’s disciplined capital management by way of share buyback and dividend hike is also impressive. In October 2018, the company announced $3 billion of share buyback. In February 2019, Allstate increased its quarterly dividend by 8.7%. Its current dividend yield of 2.1% is considerably higher than 0.43% of the industry. We believe the company’s financial strength will continue to inspire investors’ confidence in the stock.
Further, Allstate’s trailing 12-month return on equity (ROE) reinforces its growth potential. The company’s ROE of 13% has declined over the past two years but remains above the ROE of 7% for the industry. It reflects the company’s tactical efficiency in using its shareholders’ funds.
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