The Allstate Corporation Background and History
The Allstate Corporation (ALL) is a sensory brand that resonates in our memory, no doubt. The name resonates, especially when thinking of whom to pick for home and auto insurance and the fact that it serves over 16 million households. The company has been around for over 87 years and has grown throughout those years. I would also like to note, the company own Esurance, the online-based insurance provider. Therefore, Allstate’s reach is even further than one would think. In addition, it announced record-breaking revenue figures during a time of stiff competition from neighbors such as State Farm, Liberty Mutual, Geico, Nationwide… the list really goes on. At a time when switching costs are easy, the company is growing. Can this continue?
Growth may continue, as it isn’t simply an insurance provider. Allstate acquired and closed on its acquisition of InfoArmor, Inc. The company is in the identity protection business, and its primary customers are the top 100 companies in the U.S. Allstate making moves here is a great complement to its service offerings. First, identity theft from the digital footprint we all have on the web is more prevalent today and tomorrow than our yesterday ever carried. The acquisition adds more clients to the company’s Allstate Benefits Business package, and it can now add this service on to existing clients.
Given that it is a behemoth of an insurance and benefits provider, does Allstate have a spot in an investor’s portfolio, specifically a dividend investor’s? I will review the company’s latest 10-K release, which discusses and discloses its 2018 annual performance. Further, especially after Allstate announced an 8.7% dividend increase recently, I will review its dividend metrics using the beloved Dividend Diplomat Stock Screener.
The Allstate Corporation Financial Performance
2018 was a record-breaking year for Allstate. The company earned $39.8 billion in revenue, which is higher than the $39.4 billion in 2017. However, those results were skewed due to valuation changes flowing through the income statement on derivatives and investments – which had a $1.4 billion swing, negatively, from 2017 to 2018. Therefore, if you remove that from the equation on both periods, revenue would have been $40.7 billion versus $38.8 billion. When adjusted, that amounts to an increase of 5%, which is impressive in the competitive climate of insurance.
When looking at the revenue, it increased in each category, except for net investment income. However, looking at the company’s expenses below, the overall costs increased $1.6 billion. Therefore, when seeing the comments regarding the revenue increase above (excluding the fluctuations of investment valuation changes), the increase was almost completely wiped by an increase in operating expenses.
Lastly, the company’s balance sheet will help determine its ability to be agile and the safety of paying current obligations. Based on the recent 10-K filing, long-term debt did increase from $6.35 billion to $6.45 billion, or 1.6%. Further, to calculate current assets, I took Allstate’s total assets and subtracted the following: Separate Accounts, Other Assets, Goodwill and PP&E. This equates to a current asset amount of $102.9 billion. In order to calculate current liabilities, I also subtracted the following from the total: Separate accounts and long-term debt. This equates to a current liability amount of $81.7 billion. Therefore, the company’s current ratio equates to 1.26x, which is above my recommended 1x. This is a decline from 1.28x from 2017, but not that significant of a change. This shows that Allstate can be flexible and can make business ventures when it suits the company, which the acquisition of InfoArmor is a great example of. See the financials from the company’s 10-K below, from where I pulled this information.
The Allstate Corporation Dividend Analysis
Now, to the fun part. I will go over the company’s dividend growth history and the dividend valuation metrics, such as price-to-earnings ratio. Lastly, I’ll review its dividend safety from a dividend yield and payout ratio perspective.
I discussed above that the company increased its dividend in February. The increase was a solid 8.7%. This was the 8th year in a row of a dividend increase. Why so short? Well, Allstate cut its dividend during the beloved financial crises and went from 2009 through 2011, before being able to increase it again. Prior to the dividend cut, the company had 14 years of dividend increases behind it. Here is the article announcing the dividend cut over 10 years ago. The financial crisis really took many large corporations out of the Dividend Aristocrat running (25+ years of consecutive increases).
Moving towards its dividend yield, the stock price is currently trading at $96.31 (April 5th) with an annual dividend of $2.00. This equates to a dividend yield of 2.08%, which is right around the S&P 500, on average. Additionally, the company is hovering over what you could expect from a high yield savings account. The yield of 2.08% with a dividend growth rate of almost 9% pairs up fairly well actually. I like to pair the two together and call this the dividend factor, which is almost 11%.
Based on 22 different analysts, Allstate is projected to earn $9.16 this year. $2.00 being paid out as dividends equates to a payout ratio of 21.8%! That is absurdly low. I would argue there is no question to see upper single digits to low double digits for years to come with these metrics. Allstate currently retains a majority of its earnings and reinvests into its business or even acquires other businesses, such as it did with InfoArmor. The safety of its dividend yield, as well, is intact with this low payout ratio.
Last, but not least, since we have the average earning estimate and the share price, we can calculate the company’s price-to-earnings (p/e) ratio. Based on the stock price of $96.31 with an expectation of $9.16 in earnings this year, this equates to a p/e ratio of 10.51! This is extremely low in the current market environment, but the insurance industry typically does have lower earnings ratios. However, it does show a sign of undervaluation versus the market as a whole.
The Allstate Corporation Investment Analysis Conclusion
Allstate is a profitable business, and its base is wide and deep. The company is also not just your home and auto insurance provider. The example to showcase this is its recent acquisition of InfoArmor, which adds to the company’s corporate business services. Further, its balance sheet is solid, and the company has total assets covering total liabilities, as well as has sufficient current assets to satisfy all current obligations.
Allstate’s dividend metrics are definitely pleasing. It has an average yield, but the dividend growth rate fits and sits just right with its lower-average yield. Further, its payout ratio provides the safety of two areas – those being significant dividend increases in the future and that its dividend has a low risk of being cut; which is what happened back in 2009. Therefore, it appears the company is learning from prior history and wants to protect that dividend distribution going forward. Lastly, its price-to-earnings ratio shows signs of undervaluation, despite having the price increase over 16% year to date!
In conclusion – and call me stubborn – I am going to sit on the sidelines for Allstate. Given its dividend yield and price surge, I would argue there are better yield-to-market and dividend growth opportunities out there. If the dividend yield approaches 2.50%, or if I didn’t have another insurance company in my portfolio already, I would be interested. However, if you are looking for an undervalued, okay-yielding dividend stock, Allstate Corporation could leave your portfolio in a decent position. One question to ask yourself if you decide to acquire stock in the company is, “are you in Good Hands” with Allstate? Great slogan, and could be great for your portfolio. Please leave comments and share your thoughts below. As always, good luck and happy investing!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.