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Why Should You Hold on to Aon (AON) in Your Portfolio?

Zacks Equity Research

Estimates for Aon plc AON have been revised upward over the past 30 days, reflecting analysts' optimism on the stock. The stock has seen the Zacks Consensus Estimate for 2019 earnings move 0.4% north over the same time frame.

Shares of this Zacks Rank #3 (Hold) company have rallied 22%, outperforming the industry’s growth of 14.6%.

The company boasts an attractive earnings surprise history, having outpaced the Zacks Consensus Estimate in all the trailing four reported quarters, the average being 4.82%. This trend of consecutive estimate beats corroborates the company’s operational excellence.

Its return on equity — a profitability measure — is 43.5%, better than the industry average of 24.8%. Further, the metric reflects the company’s efficiency in utilizing its shareholders’ funds.

The company recently delivered fourth-quarter 2018 results of $2.16 per share, beating the Zacks Consensus Estimate by 1.4%, primarily backed by the company’s strategic actions and strong segmental performances. For the full year, the company reported $8.16 earnings per share, up 26% year over year.

Aon has witnessed a steady bottom-line improvement over the last many years, evident from its 3-year CAGR (2015-2018) of 4.34%. This upside was primarily driven by solid fundamentals such as, the company’s expansions through strategic acquisitions and partnerships plus divestitures along with a strong financial position. We expect the company's bottom line to further grow, aided by its core fundamentals like a sturdy capital position and strategic initiatives.

The company’s prudent growth-boosting programs, such as buyouts aimed at expanding its health and benefits business, flood insurance solutions, risk and insurance solutions operations as well as divestitures poise it well for growth. Aon has also sealed a number of acquisitions over the past three years. Additionally, it has been divesting non-core operations to streamline its business. The sale of businesses not only appears profitable but should also help the company focus on more profitable operations, generating higher return on equity.

Moreover, its robust financial position should attract investors’ attention. Free cash flow of the company skyrocketed 198% year over year in 2018 to $1446 million. Aon has been raising dividend since the past many years. The company further increased its payout by 11% in the second quarter of 2018. Aon's share buyback program has favored its bottom line. Its balance sheet strength, which assists in efficient capital management, should attract investors’ attention.

The company has also taken up a restructuring endeavor in order to reduce workforce and rationalize technology. These actions should fuel growth for the company eventually. In 2018, the company incurred a total of $485 million for its streamlining initiative.

However, Aon is exposed to foreign currency fluctuations and has been facing an unfavorable impact of forex volatility on its earnings per share since 2012. While an adverse forex dragged fourth-quarter net income per share by 4 cents, cash and cash equivalents were eroded by $118 million. Thus, a negative forex translation continues to impart volatility to the company’s earnings.

Moreover, the company has been witnessing high financial leverage for quite some time now. Long-term debt has been persistently deteriorating since 2014 due to an increase in commercial paper outstanding. Its current debt-to-equity ratio stands at 148% against its industry’s average of 72.8%.

The Zacks Consensus Estimate for current-year earnings per share is pegged at $9.19, representing a year-over-year increase of 12.6% on 5.6% higher revenues of $11.37 billion.

For 2020, the Zacks Consensus Estimate for earnings stands at $10.29, up 11.93% year over year on $11.9 billion revenues, which is further boosted by 5.3% rise.

The expected long-term earnings growth rate is pegged at 11.8%, higher than the industry’s average of 11.2%, which is a positive for the company.

Stocks to Consider

Investors interested in the same space might be interested in some better-ranked stocks like Cigna Corporation CI, MGIC Investment Corporation MTG and The Allstate Corporation ALL.

Cigna provides insurance and related products and services in the United States and internationally. The company sports a Zacks Rank #1 (Strong Buy) and delivered a beat in three of the last four reported quarters, the average being 11.83%. You can see the complete list of today’s Zacks #1 Rank stocks here.

MGIC Investment Corporation offers private mortgage insurance and ancillary services to lenders and government sponsored entities. It has a Zacks Rank #2 (Buy) and pulled off average trailing four-quarter earnings surprise of 22.88%.

Allstate Corporation offers property and casualty, and other insurance products in the United States and Canada. The company carries a Zacks Rank of 2 and came up with average four-quarter positive surprise of 14.48%.

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