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Allstate Stock: Poised to Rise
Stock Analysis & Ideas

Allstate Stock: Poised to Rise

I should consider Allstate Corporation (ALL) a defensive stock based on its earnings, and dividend history. Apart from the financial crisis in 2008, these have grown quite steadily over the years regardless of the market situation.

This trend reflects this stock’s attitude towards resilience, which could come in handy today if you want to be confident enough to withstand current market disruptions without taking too much damage.

I am bullish on the stock.

Allstate Corporation Earnings and Dividend History

Allstate Corporation’s dividend has risen 14.46% annually since 2013, while the industry median is 8.11%.

A steady increase in the company’s 12-month earnings (excluding special items) from 2013 through the first quarter of 2022 provided a solid foundation to continue paying dividends to shareholders, and protect owners from disappointment. This income line has increased by 12.2% annually during the period in question.

About Allstate

Allstate offers property, casualty, and various other insurance products.

It sells its products in North America through call centers, agencies, brokers, wholesale partners, and online and mobile applications.

Allstate Corporation has its headquarters in Northbrook, Illinois.

Q1 2022 Results

In the first three months of 2022, each business segment performed as expected, recouping some losses the company suffered from investments and derivatives. Total revenue was $12.34 billion, flat year-over-year, but enough to beat analysts’ median forecast by $1.2 billion.

By segment, sales were as follows.

Property and Casualty insurance premiums (representing 89% of total revenue) increased 5.92% year-over-year. Accident and Health insurance premiums and contracts — which accounted for nearly 4% of total revenue — increased 3.1% from the year-ago quarter.

Allstate posted pro forma earnings of $2.24 per share, but it missed analysts’ median estimate by $0.71.

Property and Casualty (P&C) Insurance Market

The P&C market is highly fragmented, reducing growth opportunities for insurers. Because of this market characteristic, many insurers’ profitability is deteriorating, and perhaps merging with other companies could be a way out.

Monetary easing didn’t help these operators either, as lower interest rates put pressure on insurance premiums. Especially during the COVID-19 crisis, when the Federal Reserve cut interest rates to enable households and businesses to meet the challenges of the time.

Before the pandemic, the market was performing well as both the net underwriting gains and the industry surplus were on the rise, and the two-year average growth rate in net written premiums was one of the strongest ever.

Not Afraid of Competition

Allstate has proven in both the pre-pandemic era and the year of the pandemic that it can hold its own against stiff competition.

Operating profit margin increased from 12.9% in 2017 to 14.2% in 2019, while profit margin from continuing operations increased from 9% in 2017 to 10.4% in 2019.

In the year of the pandemic, the operating profit margin and profit margin from continuing operations grew to nearly 20% and 13%, respectively, as of 2019.

In 2021, levels were lower than last year, but for Allstate roughly in line with 2019 levels, although the year has not been easy for the industry.

Allstate’s 12-month dividend is up almost 35% in 2021, while most of its peers have not exceeded the 7.25% growth rate.

Outlook and Growth Estimates

As the Federal Reserve continues to hike interest rates to combat runaway inflation after adding 25 basis points in March and 50 basis points in May, it should benefit the Allstate and other insurers.

According to Mordor Intelligence, the US P&C insurance market should grow at 6% annually from 2022 to 2027, but that pace is likely to be exceeded as the Federal Reserve seeks rapid monetary tightening.

Balance Sheet

Allstate’s balance sheet is moderately solid.

The debt-to-EBITDA ratio of 1.79 versus the industry median of 1.03 shows the company is taking a little longer than most of its peers to repay loans through operating income. It takes one year and nine months to pay off all debt through EBITDA, while for most competitors it takes about one year.

Additionally, an interest coverage ratio of 10.6 suggests Allstate can easily sustain the financial burden of paying interest charges on time, so not a problem at all if EBITDA is a bit shorter to cover the debt. Ideally, this ratio should be at least 1.5.

Higher interest rates will not cause efficiency problems, but will improve the profitability of the company’s operations.

Wall Street’s Take

In the past three months, twelve Wall Street analysts have issued a 12-month price target for ALL. The company has a Moderate Buy consensus rating based on six Buys, five Holds, and one Sell rating.

The average Allstate Corporation price target is $146.64, implying 12.2% upside potential.

Valuation

The stock has a market cap of $36 billion, a P/E ratio of 10.6, and a 52-week range of $106.11 to $144.46.

The stock has a price/book ratio of 1.96, a price/sales ratio of 0.95, a price-to-cash flow ratio of 9.2, and a price-to-free cash flow ratio of 9.3.

Conclusion

This stock represents a resilient company, able to weather the headwinds of a challenging environment. The company is a staunch dividend payer as earnings grow year after year.

As such, the stock is a solution to weathering the market turmoil we are currently experiencing, which will likely intensify as higher interest rates stoke fears of a recession.

The continued tightening of monetary policy by the U.S. Federal Reserve increases the likelihood of this insurer increasing its dividend further, which should be positive for the share price.

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