Here's Why You Should Keep Aon (AON) Stock in Your Portfolio
Aon plc AON has been in investors’ good books on the back of its cost-cutting measures and inorganic growth strategies.
It retained investors' bullish sentiment by maintaining its beat streak in three of the last four quarters (missing the mark in one), the average earnings surprise being 1.1%. This upside further underlines its operational excellence.
Aon’s second-quarter 2020 operating earnings of $1.96 per share surpassed the Zacks Consensus Estimate by 2.1%. Also, the bottom line improved 5% year over year on reduced operating expenses, partially offset by lower revenues.
Its return on equity — a profitability measure — is 51.6%, better than the industry average of 25.9%. A strong ROE in turn, reflects the company’s efficiency in utilizing its shareholders’ funds.
Over the years, acquisitions have been instrumental in building Aon’s growth trajectory. Its buyouts mainly aim at expanding its health and benefits business, flood insurance solutions, and risk and insurance solution operations. The company also forged several alliances to enhance its capacity, thereby emerging as one of the largest insurance brokers. The company made its progress related to the Wills Towers Watson buyout, which is expected to close in the first half of 2021. Aon also completed six acquisitions during the three months ended Jun 30, 2020. We believe, these deals are likely to accelerate long-term growth.
The company has also been divesting its non-core operations to streamline business. The sale of businesses will streamline the company’s operations, allowing it to focus on more profitable operations, generating higher return on equity.
Aon’s restructuring efforts to reduce workforce and rationalize technology aided it to deliver $529 million of annualized savings in 2019. Aon spent $1.48 billion on restructuring and its related separation costs right from the inception of reorganizing plan through Jun 30, 2019. This investment is driving expense saving as well as aiding the company to grow. Moreover, given the current uncertainty revolving around the COVID-19 pandemic, the company initiated reducing its non-compensation costs starting March.
It has witnessed a steady bottom-line improvement over the last many years on the back of its strong fundamentals, such as expansions through buyouts and collaborations, divestitures and a solid financial position. Although in the first six months of 2020, the metric remained flat, we expect the company's earnings to rise in the near term, aided by its core fundamentals, such as a strong capital position and strategic initiatives.
However, the company has been issuing debts occasionally to repay its dues. Long-term debt has been persistently mounting since 2014 due to an increase in commercial paper outstanding. Moreover, its total debt is 68.4% (compared with 71.3% as of Mar 31, 2020) of total capital, higher than the industry’s average of 55.1%.
The Zacks Consensus Estimate for current-year earnings is pegged at $9.72, indicating a rise of 6% from the prior-year reported number.
Shares of this currently Zacks Rank #3 (Hold) company have gained 3.3% in a year’s time, underperforming its industry’s growth of 7.4%.
Stocks to Consider
Investors interested in the insurance industry may look into some better-ranked stocks like Fanhua Inc. FANH, eHealth, Inc. EHTH and Brown Brown, Inc. BRO. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Fanhua is a provider of financial services. The company managed to pull off a trailing four-quarter earnings surprise of 6.2%, on average, (beating estimates in three quarters while missing the same in one). It presently carries a Zacks Rank #2 (Buy).
eHealth is the leading online source of health insurance for individuals, families and small businesses. Currently sporting a Zacks Rank #1 (Strong Buy), the company came up with a four-quarter earnings surprise of 82%, on average.
Brown & Brown markets and sells insurance products and services. The company delivered a beat of 7.9% in the last four quarters, on average. It carries a Zacks Rank of 2 at present.
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