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Why You Should Hold American Financial in Your Portfolio

Zacks Equity Research

American Financial Group AFG is poised for growth given favorable operating profitability, effective capital management and solid performance of limited partnerships.

The stock carries a VGM Score of B. VGM Score helps to identify stocks with the most attractive value, best growth and the most promising momentum.

Shares of American Financial have rallied 20.9% in a year’s time, outperforming the industry’s increase of 11.9%.

 

This Zacks Rank #3 (Hold) company has a decent earnings surprise history. It beat estimates in two of the trailing four quarters, with the average being 3.63%.

American Financial’s return on equity was 12.8% in the trailing 12-month period, higher than the industry average of 6.9%. Return on equity is a profitability measure that identifies the company’s efficiency in utilizing its shareholder funds.

Solid performance of limited partnerships and similar investments continue to drive investment income. Management projects investment income to grow 4% to 7% in 2019, up from 2-6% guided earlier.

Banking on strong operating profitability and effective capital management, American Financial has been hiking dividend each year apart from paying special dividend. In August 2019, the company raised its quarterly dividend by 12.5% while in May, it paid out a special dividend of $1.51 per share. These endeavors make the stock an attractive pick for yield-seeking investors. Its dividend yield of 1.6% compares favorably with the industry average of 0.4%.  

The Zacks Consensus Estimate for 2019 and 2020 earnings per share is pegged at $8.60 and $8.95, indicating year-over-year increase of nearly 2.4% and 4.1%, respectively. The expected long-term earnings growth rate is pegged at 5.4%. The stock also carries a favorable Value Score of A.

However, some of the challenges faced by the insurer are exposure to catastrophe losses and drought that induce volatility in earnings. Also, soft performance at the Annuity business tends to weigh on earnings.

Stocks to Consider

Some better-ranked property and casualty insurance stocks include Donegal Group Incorporation DGICA, Hallmark Financial Services HALL and Cincinnati Financial CINF. While Donegal Group sports a Zacks Rank #1 (Strong Buy), Hallmark Financial Services and Cincinnati Financial carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Donegal Group provides personal and commercial lines of property and casualty insurance to businesses and individuals in the Mid-Atlantic, Midwestern, New England, and southern states. The company beat estimates in the trailing four quarters by 248.34% on average.

Hallmark Financial Services operates through three segments. It underwrites, markets, distributes and services property and casualty insurance products in the United States. Its insurance products are marketed through general agents and specialty brokers. The company came up with average four-quarter positive surprise of 97.5%.

Cincinnati Financial provides property casualty insurance products in the United States and operates in five segments. The company offers services like commercial leasing, insurance brokerage. The company delivered average four-quarter positive surprise of 19.75%.

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