For beginners, it can seem like a good idea (and an exciting prospect) to buy a company that tells a good story to investors, even if it completely lacks a track record of revenue and profit. But as Warren Buffett has mused, 'If you've been playing poker for half an hour and you still don't know who the patsy is, you're the patsy.' When they buy such story stocks, investors are all too often the patsy.
In contrast to all that, I prefer to spend time on companies like Hanover Insurance Group (NYSE:THG), which has not only revenues, but also profits. Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.
How Fast Is Hanover Insurance Group Growing?
As one of my mentors once told me, share price follows earnings per share (EPS). That makes EPS growth an attractive quality for any company. We can see that in the last three years Hanover Insurance Group grew its EPS by 12% per year. That's a good rate of growth, if it can be sustained.
I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company's growth. Hanover Insurance Group maintained stable EBIT margins over the last year, all while growing revenue 6.5% to US$4.7b. That's progress.
The chart below shows how the company's bottom and top lines have progressed over time. To see the actual numbers, click on the chart.
You don't drive with your eyes on the rear-view mirror, so you might be more interested in this free report showing analyst forecasts for Hanover Insurance Group's future profits.
Are Hanover Insurance Group Insiders Aligned With All Shareholders?
We would not expect to see insiders owning a large percentage of a US$5.2b company like Hanover Insurance Group. But we do take comfort from the fact that they are investors in the company. Indeed, they hold US$41m worth of its stock. That's a lot of money, and no small incentive to work hard. Despite being just 0.8% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.
It's good to see that insiders are invested in the company, but are remuneration levels reasonable? Well, based on the CEO pay, I'd say they are indeed. For companies with market capitalizations between US$4.0b and US$12b, like Hanover Insurance Group, the median CEO pay is around US$6.9m.
Hanover Insurance Group offered total compensation worth US$4.2m to its CEO in the year to December 2018. That comes in below the average for similar sized companies, and seems pretty reasonable to me. While the level of CEO compensation isn't a huge factor in my view of the company, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. I'd also argue reasonable pay levels attest to good decision making more generally.
Should You Add Hanover Insurance Group To Your Watchlist?
As I already mentioned, Hanover Insurance Group is a growing business, which is what I like to see. The fact that EPS is growing is a genuine positive for Hanover Insurance Group, but the pretty picture gets better than that. With a meaningful level of insider ownership, and reasonable CEO pay, a reasonable mind might conclude that this is one stock worth watching. Now, you could try to make up your mind on Hanover Insurance Group by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.
Although Hanover Insurance Group certainly looks good to me, I would like it more if insiders were buying up shares. If you like to see insider buying, too, then this free list of growing companies that insiders are buying, could be exactly what you're looking for.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
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