Allstate: Buy This Dividend Growth Stock And Sleep Well At Night

Allstate: Buy This Dividend Growth Stock And Sleep Well At Night

Heap Of Money After rallying 27% last year, the S&P 500 has fallen 12% year-to-date . A variety of economic and geopolitical factors have contributed to the S&P 500’s correction through the first two and a half months of this year.

But perhaps not surprising to anyone that has followed me on Seeking Alpha over the past several years is the fact that many dividend growth stocks have significantly outperformed the broader market this year.

The property and casualty insurer Allstate ( ALL ) is one such stock. Despite the 4% rise in Allstate’s stock price year-to-date , I still believe the stock is a buy. Let’s dig into Allstate’s fundamentals and valuation to better understand my thought process. Dividend Coverage Remains Very Strong

Last month, Allstate declared a 4.9% increase in its quarterly dividend to $0.85 per share. While it’s often said that the safest dividend is the one that’s just been raised, I like to make sure that a stock can afford its dividend regardless.

The first way that I do so is by comparing a stock’s dividend yield to its industry average. Allstate’s 2.76% dividend yield is nearly double the insurance – property and casualty industry average of 1.44% . That’s materially higher than the industry average, but no one metric can tell the whole story.

Allstate reported $13.48 in adjusted diluted EPS in 2021 (according to page 1 of Allstate’s Q4 2021 earnings press release ) against $2.97 in dividends per share paid during the year . This is equivalent to a 22% adjusted diluted EPS payout ratio.

And analysts are forecasting $9.86 in adjusted diluted EPS for this year (and a recovery to $13.31 in 2023 as insurance claims normalize). Stacked against the $3.36 in dividends per share set to be paid this year, this is a still manageable 34.1% adjusted diluted EPS payout ratio.

Given that Allstate was able to generate 16% annual earnings growth over the last five years, I believe that the company will be able to post 7% to 8% annual earnings growth for the foreseeable future. This is the basis of why I believe Allstate will be able to grow its dividend at a 7.5% annual rate over the long haul. Allstate Performed Well Given The Circumstances

Allstate Q4 2021 Earnings Press Release When considering the obstacles that Allstate faced and the difficult comparison period, I believe the stock produced admirable operating and financial results for its shareholders in 2021.

Allstate was able to boost its total policies in force by 9.8% year-over-year to 190.9 million in 2021 (according to page 1 of Allstate’s Q4 2021 earnings press release). Along with a doubling in net investment income to $3.3 billion during the year, this led Allstate’s consolidated revenue 20.7% higher year-over-year to $50.6 billion during the year (data sourced from pages 5 and 1 of Allstate’s Q4 2021 earnings press release).

However, Allstate’s adjusted diluted EPS of $13.48 in 2021 represented a 5.7% decline against the year-ago period (details according to page 1 of Allstate’s Q4 2021 earnings press release). Although a decline in earnings is never what investors want to see, it’s important to put things in context.

Allstate’s exceptionally high earnings base in 2020 was powered by fewer customers filing claims due to their reduced travel stemming from the COVID-19 pandemic.

As more customers began to return to work and travel in 2021, auto accidents and claims volumes increased. This was also exacerbated by the current inflationary environment, which pushed the costs to settle claims higher. This caused Allstate’s underlying combined ratio to surge 680 basis points higher year-over-year to 86.2% in 2021 (data points per page 1 of Allstate’s Q4 2021 earnings press release).

In response, Allstate has recently raised auto insurance rates and taken steps to reduce its costs. As pent-up demand for travel fades, claims activity should normalize.

Allstate’s increased operating efficiency and auto insurance rates should lead to a resurgence in profitability in 2023 and beyond. Allstate Q4 2021 Earnings Press Release The other tailwind that will help Allstate going forward will be the interest rate hikes that the Federal Reserve has planned for this year .

This will be a buoy to Allstate’s $64.7 billion investment portfolio, which will push net investment income considerably higher in the quarters and years ahead ($64.7 billion figure sourced from page 7 of Allstate’s Q4 2021 earnings press release).

Taking these factors into consideration, Allstate’s growth outlook beyond this year will be just fine. And at the right valuation, the stock could be a lucrative investment for shareholders over the […]

source Allstate: Buy This Dividend Growth Stock And Sleep Well At Night

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