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What Makes Allstate (ALL) an Attractive Investment Option

Zacks Equity Research

The 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 have helped it to achieve growth. A strong balance sheet and intelligent capital management are other positives. The acquisition of SquareTrade, PlumChoice and InfoArmor will provide diversification benefits.

The Zacks Ranked #2 (Buy) stock has witnessed 1.2% upward revision in 2019 earnings estimates over the past seven days. The stock carries an impressive Value Score of A. Our research shows that stocks with a Value Style Score of A or B when combined with a Zacks Rank #1(Strong Buy) or 2 offer the best opportunities in the value investing space.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Year to date, the stock has gained 24% compared with the industry’s growth of 3.4%. Other players in the same industry such as American International Group, Inc. AIG, The Progressive Corp. PGR and Chubb Limited CB have gained 32%, 26% and 21%, respectively.

Factors That Make the Stock Look Attractive

Property-Liability Business Performing Strongly: The company's property and liability business continues to be profitable owing to pricing discipline and strong claims management. It is also benefiting from past acquisitions and growth in the emerging businesses as reflected by consistent increase in earned written over the years. The trend continued in the first six months of 2019, reflecting a 6% increase in net written. We expect the segment to continue adding to its top line, given a number of strategic initiatives undertaken for growth, such as product enhancements and changes in business mix to focus on those that command a high return on equity.

Also, its combined ratio, which measures the profitability of an insurance company, (the lower the better) has improved to 93.6% in 2019 from 96% in 2018. This reflects the company’s control on its claims cost as well as other expenses. Though Allstate is exposed to catastrophic losses, it has covered itself well by the use of reinsurance to  deal with these losses.

Growing Service Business:  The company 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. Allstate also acquired PlumChoice in 2018, a leading provider of cloud and technical support services to consumers and small businesses. In February 2019, iCracked was acquired in this segment,  These buyouts will expand its Service business, which grew premiums by 6.5% in the first half of 2019.
Decline in Leverage: The company’s debt-to-equity ratio has moderated to 27% from 30% in 2013. Times interest earned of Allstate, a ratio that measures a company’s ability to pay its interest expenses is 11, better than the industry average of 10.7. A decline in leverage strengthens the company’s balance sheet and reduces financial risk.

Strong Balance Sheet and Efficient Capital Management: 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. Its disciplined capital management by way of share buyback and dividend hike is also impressive.  In February, Allstate increased its quarterly dividend by 24%. Its current dividend yield of 2.2% is considerably higher than 0.53% of the industry. We believe, the company’s financial strength will continue to inspire investors’ confidence in the stock.

Strong ROE: Allstate’s trailing 12-month return on equity (ROE) reinforces its growth potential. The company’s ROE of 13% has improved over the past two years and remains way higher than the industry’s 6.8% ROE, reflecting its tactical efficiency in using its shareholders’ funds.

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