Aon plc AON has been favored by investors on the back of its cost-cutting measures and inorganic growth strategies.
This bullish sentiment is retained by the company’s continued beat streak in three of the last four quarters (missing the mark in one), the average earnings surprise being 1.1%. The upside further underlines its operational excellence.
Aon is expected to make progress, evident from its favorable VGM Score of B. Here V stands for Value, G for Growth and M for Momentum with the score being a weighted combination of all three factors.
Its return-on-equity (ROE) reflects growth potential. The company’s trailing 12-month ROE of 65% compares favorably with the industry average of 27.4%, reflecting its efficiency in utilizing its shareholders’ funds.
Being a leading insurance brokerage company, Aon always made buyouts to boost its portfolio like many of its peers. Its buyouts mainly aim at expanding its health and benefits business, flood insurance solutions, and risk and insurance solution operations. Strategic collaborations also expand Aon’s capacity and make it one of the largest insurance brokers. The series of buyouts aided the company to enhance its capabilities over the years. Notably, Aon completed six acquisitions during the nine months ending Sep 30, 2020. The company is also on course to acquire Wills Towers Watson, which is expected to close in the first half of 2021.
Apart from buyouts, the company has been divesting non-core operations to streamline its business. It continued with strategic divestitures in 2019 as well. The sale of businesses will condense the company’s operations to allow it to focus on more profitable activities, which generate higher return on equity.
The company’s restructuring measures are commendable, on the back of which it was able to deliver $529 million of annualized savings in 2019. Aon spent $1.48 billion on restructuring and related separation costs, right from the inception of its reorganizing plan through Jun 30, 2019. In the first nine months of 2020, the company’s operating expenses declined 7% year over year. Costs for the remainder of the year are expected to be consistent with the underlying expenses in 2019 excluding adjusted items.
Given the current uncertainty revolving around the COVID-19 pandemic, the company has already initiated reducing its non-compensation costs since March this year.
Notably, Aon resumed its share repurchase plan in the third quarter despite the prevalent economic situation. On its last earnings call, management confirmed that it will continue to repurchase shares while maintaining higher-than-normal levels with cash for the near future.
Moreover, its board of directors recently authorized a new share buyback program worth $5 billion in a bid to return more value to its shareholders. This presently Zacks Rank #3 (Hold) insurance broker has increased dividends for the past nine straight years with the latest 5% hike being announced in October. Such initiatives reflect the operational and financial strength of the company and this should instill investor’s confidence in the stock.
The Zacks Consensus Estimate for current-year earnings is pegged at $9.67, indicating a rise of 5.5% from the prior-year reported number.
Shares of Aon have gained 1.8% in a year’s time, underperforming its industry’s growth of 4.6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The performance looks paler than that of its peers Arthur J. Gallagher & Co. AJG, Brown & Brown, Inc. BRO and Marsh & McLennan Companies, Inc. MMC, which have gained 24.4%, 20.8% and 6.4%, respectively, in the same time frame.
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