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Allstate Strong on Higher Premiums, Balance Sheet Strength

Zacks Equity Research
·4 mins read

The Allstate Corp. ALL looks well-poised for growth despite the coronavirus-led economic weakness on the back of a number of strategic initiatives, which bode well for the long haul.

Allstate's diversified business model, substantial earnings capacity and strong liquidity enable it to manage operations effectively through this pandemic.

The stock has seen the Zacks Consensus Estimate for current-year earnings being revised 16.3% upward over the past 30 days.

The stock currently has a Zacks Rank #2 (Buy) and an impressive Value Score of A. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here. Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1 or 2, offer the best opportunities in the value investing space.

The company's top line has been increasing over the years owing to its broad product suite and pricing discipline. It is also benefiting from past acquisitions and growth in the emerging businesses, evident from a consistent increase in premiums written over the years. In the first six months of 2020, premiums written were up 2.3% year over year. We expect revenue growth to continue, given a number of strategic initiatives taken, such as product enhancements and changes in business mix to focus on those that command a high return on equity.

Allstate is on course to acquire National General Holdings Corp. The deal win will advance its strategy to increase its market share in the personal property-liability space, which will likely inch up 1%. The acquisition will be accretive to the industry player’s earnings per share and ROE, thereby reflecting its significant cost synergies. The company expects a high single-digit earnings accretion in the first year post closure of the transaction. It also anticipates the ROE accretion of approximately 100 bps, mirroring the entity’s substantial cost efficiencies.

Allstate is making concerted efforts to expand its Service business, which provides diversification benefits. In this vein, it acquired SquareTrade in 2017, a provider of protection plans for mobile phones, consumer electronics and appliances. The company also purchased PlumChoice in 2018, which is a leading provider of cloud and technical support services to consumers and small businesses. In February 2019, iCracked was bought, which expanded SquareTrade’s protection offerings. These buyouts will extend the company’s Service business, which saw 7.3% revenue growth in 2019 and a further 13.7% uptick during the first six months of 2020.

Allstate’s cash flow has been increasing over the years. Disciplined capital deployment through share buybacks and dividend hikes is also impressive. Over the past year, the company has repurchased 5.2% of outstanding shares. In February this year, Allstate raised its quarterly dividend by 8%. Its current dividend yield of 2.3% is considerably higher than the industry’s average of 0.4%. We believe, the company’s financial strength will continue to instill investors’ confidence in the stock.

Its trailing 12-month return on equity (ROE) reinforces its growth potential. The company’s ROE of 17.5%, which has increased over the past two years (2018 & 2019), remains way above the industry’s reading of 6.5%, thereby reflecting its efficiency in utilizing its shareholders’ funds.

Year to date, the stock has lost 16% compared with the industry's decline of 5.3%.

Some other stocks worth considering are Dongeal Group Inc. DGICA, First American Financial Corp. FAF and Fidelity National Financial Inc. FNF, each stock currently sporting a Zacks Rank of 1.

Earnings of both Fidelity National, First American and Dongeal Group beat estimates in each of the trailing four quarters, the average being 32.13%, 20.84% and 86.44%, respectively.

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The Allstate Corporation (ALL) : Free Stock Analysis Report
 
First American Financial Corporation (FAF) : Free Stock Analysis Report
 
Fidelity National Financial, Inc. (FNF) : Free Stock Analysis Report
 
Donegal Group, Inc. (DGICA) : Free Stock Analysis Report
 
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Zacks Investment Research