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Why Hold Strategy is Apt for Aon (AON) in Your Portfolio

Zacks Equity Research

Aon plc AON remains well-poised for growth, given its strong revenue momentum, strategic initiatives and a robust capital position.

Its return on equity — a profitability measure — is 43.9%, better than the industry average of 24.8%. This reflects the company’s efficiency in utilizing its shareholders’ funds.

The company also retained investors' optimism by sustaining its beat streak in all the last four reported quarters, the average being 4.57%. This definitely echoes the company’s operational excellence.

Aon has been witnessing a strong revenue momentum over the past several years. This upside was backed by the company’s core growth strategies and solid fundamentals, such as expansions through alliances and buyouts.

It has closed several acquisitions over the span of last three years. In 2017, it completed 17 acquisitions to boost its capabilities by adding the same to its portfolio. Its buyouts are mainly aimed at broadening its health and benefits business base, fortifying flood insurance solutions and also, driving risk and insurance solutions operations. Additionally, strategic collaborations boost Aon’s capacity and make it one of the largest insurance brokers. These transactions are likely to accelerate long-term growth for the company.

Furthermore, it has been divesting non-core operations to streamline its business. During the 2010-2015 period, the company sold 27 businesses in the Risk Solutions segment and even seven businesses in the HR Solutions segment, which generated a substantial pre-tax gain. The company is continuously restructuring its operations and has completed three dispositions in the first nine months of 2018. The sale of these businesses not only appears profitable but should also help the company focus on more profitable operations, thereby garnering higher return on equity.

Aon has been witnessing a solid free cash flow over the past few years. Though the same declined in 2017, it again increased during the first nine months of 2018. Investors are impressed by its dividend hike for the past several years. Aon's share buyback program has aided its bottom line as well. Moreover, its balance sheet strength, which assists in efficient capital management, attracts investors’ attention.

However, the company has been suffering due to high financial leverage (60% debt-to-capital ratio compared with the industry average of 42%). A high level of leverage has induced a rise in interest expenses, weighing on its margins.

For 2019, the Zacks Consensus Estimate for earnings stands at $9.20 on $11.42 billion revenues, translating into a respective 13.1% and 5.4% rise.

Shares of this Zacks Rank #3 (Hold) company have gained 5.6% in a year’s time, outperforming the industry’s increase of 3%.


Stocks to Consider

Investors interested in the insurance industry might take a look at a few better-ranked stocks like MGIC Investment Corporation MTG, CNO Financial Group, Inc. CNO and MetLife, Inc. MET. 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 in the United States. The stock sports a Zacks Rank #1 (Strong Buy) and came up with average four-quarter positive surprise of 34.32%.

CNO Financial develops, markets and administers health insurance, annuity, individual life insurance and other insurance products in the United States. It delivered average four-quarter earnings surprise of 11.7%. The company has a Zacks Rank of 2.

MetLife provides solutions to insurance, annuities, employee benefits and asset management businesses. It came up with average four-quarter beat of 9.67%. The company carries a Zacks Rank #2 (Buy).

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