TipRanks Smart Dividend Newsletter – Edition #22
Hello and welcome to the 22nd edition of TipRanks’ Smart Dividend – a weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.
Today’s dividend stock recommendation is one the world’s largest insurers, with a 133-year history of successful global expansion and impressive market presence. The company we are recommending has a clear shareholder-compensation strategy and is committed to increasing its already very high dividend yearly.
But first, let us present a brief investment thesis, supporting our recommendation.
Investment Thesis: Double Check
The insurance and asset management sectors are rife with potential, particularly when considering their ability to harness and integrate multiple revenue streams. Such industries are uniquely positioned, blending traditional risk management with the forward momentum of modern finance, acting as both safeguards for assets and avenues for growth.
At its core, the insurance industry is a reflection of society’s evolving risks and the continual need for protection against them. As global complexities rise – be it from technological advancements, climate change, health pandemics, or geopolitical shifts – the demand for insurance products expands and diversifies. This continual adaptation to new challenges ensures a consistent stream of revenue. Moreover, the industry’s inherent structure allows it to amass vast capital reserves, making it a hub for reinvestment and growth.
With the integration of advanced data analytics and AI, insurers are now better poised to assess risks and price their products more accurately, further enhancing profitability. The cyclical nature of premiums and claims, paired with the capacity to invest policyholders’ premiums, makes the insurance sector not just a shield against uncertainties but a powerful financial engine rife with investment opportunities.
Furthermore, the asset management sector complements the insurance business. While insurance revolves around the protection of wealth, asset management focuses on its growth and multiplication. For investors, a company that operates in both spheres offers a unique blend: the stability and predictable cash flow from insurance premiums, and the potential for higher returns and fee income from asset management. This dual approach not only diversifies revenue streams but also provides a holistic financial ecosystem that can thrive in varied economic conditions.
Quality Dividend Stock: This Week’s Top Pick
Allianz SE (DE:ALV or ALIZY) is a German multinational holding company, which, through its subsidiaries, operates as a global financial services provider with services predominantly in the insurance and asset management business.
Allianz was founded in Berlin in 1890 as a German marine and accident insurance company. Within just several years, Allianz began its international expansion, opening a branch in London in 1893, a move that was swiftly followed by entrance to several European markets. Allianz shifted its headquarters to Munich in 1949 due to the split between East and West Germany. Global business activities were gradually resumed after the WW II; in 1970, the company established a branch in the U.S., along with continued expansion to countries outside of the European region. In the 90s, Allianz added business expansion to its geographical growth, developing its international asset management business. The acquisition of PIMCO, an American global investment management firm focusing on active fixed income management, in 1999, helped Allianz skip a few steps on its way to become a leading asset manager. In 2007 Allianz became a founder member of the Standards Board for Alternative Investments (SBAI), an international standard-setting body for the alternative investment industry.
Today, with a market capitalization of $93 billion, annual revenue of $162 billion, and about 160,000 employees, Allianz is a Fortune Global 500 company. It is the world’s third-largest insurance company, providing property-casualty insurance and life/health insurance services to over 122 million retail and corporate clients in more than 70 countries. Although the vast majority of ALV’s revenue comes from the insurance business, Allianz is one of the world’s largest asset managers, with assets under management (AUM) of $1,735 billion at the end of 2022.
Allianz SE is a parent company of the Allianz Group, its international insurance and asset management center, which works through four main segments: Property-Casualty, Life/Health, Asset Management, and Corporate and Other. The Property-Casualty segment offers various insurance products, including motor liability and own damage, accident, general liability, fire and property, legal expense, credit, and travel. The Life/Health segment provides a range of life and health insurance products on an individual and a group basis, such as annuities, endowment and term insurance, and unit-linked and investment-oriented products, as well as private and supplemental health, and long-term care insurance products. The Asset Management segment offers institutional and retail asset management products and services to third-party investors comprising equity funds, fixed income funds, and multi-asset funds; and alternative investment products that include real estate, infrastructure debt/equity, real assets, liquid alternatives, and more. The company manages corporate and private clients’ assets through its investment management units, PIMCO and Allianz Global Investors GmbH. The Corporate and Other segment provides banking services for retail clients, as well as digital investment services.
Allianz’s business is highly diversified. The company derives 42% of its operating profit from the Property-Casualty insurance segment, 36% from its Life/Health insurance segment, and 22% from Asset Management segment. In terms of geographical diversification, Germany, Western & Southern Europe, and the U.S. each represent about a quarter of 2022’s annual operating profit. The rest is derived from other countries and regions.
Through the years, Allianz has grown into an insurance and investment giant through its aggressive acquisitions strategy. The most notable acquisitions of the recent years include purchase of Aviva Group’s (U.K.’s largest life insurer) operations in Poland and Lithuania in 2021, as well as Aviva Italia S.p.A., the Italian property & casualty insurance entity of the Aviva Group. In 2022, Allianz purchased a majority stake in European Reliance, a leading insurer in Greece. In October 2023, Allianz acquired an Italian insurer Tua Assicurazioni S.p.A. In addition to buyouts of insurers, the company has invested in and acquired several financial technology (FinTech) companies with an aim to streamline its digital presence. In 2022, Allianz, through its digital investment unit Allianz X, acquired Innovation Group, U.K.’s service provider for the management of complex claims in the automotive and real estate sector. In 2023, the company bought Berlin-based embedded insurance pioneer Simplesurance.
Despite its numerous acquisitions and purchases, Allianz’s solvency position remains stellar. Its debt-to-equity ratio of 47% is considered medium-low; the company has more cash than debt. The company’s Solvency II Ratio (regulatory requirement for insurance firms, covering financial resources, governance and accountability, risk assessment and management, supervision, reporting and public disclosure) is 208%, versus the minimum requirement of 100%. The company’s debt is highly rated by the global credit rating agencies: “AA” at S&P Ratings, “Aa2” at Moody’s, and “AA-” at Fitch.
Allianz’s exceptionally strong liquidity position is underscored by its current ratio of 7.2, quick ratio of 5.3, and cash ratio of 1.1. The company’s capital efficiency ratios may seem low at a first glance; however, they compare favorably to the industry averages. Thus, Allianz’s Return on Equity (ROE) of 17.5 is much higher than the industry average of 10.1, while its Return on Assets (ROA) of 1.1 is in line with the average.
According to Fitch Ratings, Allianz has “very strong business profile,” is “well-diversified by business line, geographical exposure, and distribution channels,” has “very strong solvency and capitalization,” as well as a “very strong underlying profitability.” Moody’s raised Allianz’s rating by one notch in September 2023, saying that “a high level of recurrent profits enables the group to protect and grow its capital and enhances its financial flexibility.”
In August, Allianz reported its Q2 2023 and H1 2023 financial results. In the second quarter, revenue surged 75% from 2Q 2022, net income increased 19% year-on-year; however, profit margin fell to 5% from last year’s 7.5%, driven down by higher expenses. In Q2, EPS beat estimates, surging by over 55% year-on-year; earnings-per-share built on their exceptional growth in Q1, when they rose by almost 300% year-on-year. In the first half of the year, total business volume rose by 8.7% year-over-year; operating profit increased 14.9%, and net profit surged by 90%. The growth in both Q2 and H1 figures was primarily driven by the Life/Health and the Property-Casualty business segments, while the Asset Management segment’s impact on revenue and earnings was negative.
The company’s financial strength supports its capital allocation strategy, which includes a structured dividend policy and flexible payout of excess capital via share buybacks. Allianz SE has been paying regular annual dividends since 2009. According to the company’s statement, Allianz strives to offer attractive dividends to its shareholders, with a stated objective of paying a dividend-per-share in an amount of at least 5% above the amount of the previous year. In fact, the company has consistently increased its dividend by an average of 10% over the last decade. The latest dividend increase was in August 2023, when the payout rose by 5.6%.
Currently, its dividend yield of 5.2% makes Allianz one of the highest dividend payers in Europe, ranked high in terms of its yield in the U.S. Despite the consistent dividend growth, the company’s payout ratio remains at a healthy 50%.
In addition to dividends, Allianz returns capital to its shareholders through buybacks within the framework of its share repurchase programs. The current buyback program was approved in May 2023 with the volume amounting to $1.6 billion; the program will be completed by December 31, 2023, at the latest. From the commencement of this program on September 11th and up to October 6th, the company has purchased 0.44% of its shares for $430 million. Allianz has repurchased shares valued at $11.6 billion since 2017.
As a result of Allianz’s excellent position, its stock is considered a heavyweight in insurance sector indices, as well as general European indexes. Allianz is a number one holding (by weight) in the STOXX Europe 600 Insurance Index; number three in DAX Index, which holds 40 German companies with the highest market capitalization; and number eight in EURO STOXX 50 Index, which holds 50 companies with the highest market capitalization in Europe.
Allianz’s stock trades on Frankfurt and other German exchanges under the ticker ALV (this is the ticker that contains financial and business data, as well as analysts’ outlook and more, as ADRs are generally not well-covered). In the U.S., Allianz SE ADRs trade under the ticker ALIZY since January 2020 (this is the ticker for which we will review the stock performance since the European shares are less relevant to U.S. investors).
In the past three years, ALIZY has underperformed the SPDR S&P Insurance ETF (KIE), rising 20% versus the ETF’s 39% (in that period, ALV rose by 34% as the large European shares have generally registered stronger performance than their U.S. peers). However, in the past 12 months ALIZY has surged 32%, beating KIE’s 8% gain, as Allianz’s financial strength and market dominance found reflection in analysts’ reviews and price targets.
Despite the strong performance in the past year, ALIZY trades at modest valuations: its TTM P/E of 10 and Forward P/E of 9.3 represent a 10% and a 4% premium to the U.S. financial sector’s averages, respectively. These premiums should be viewed as low, considering that Allianz’s dividend yield is more than twice the sector’s average of 2.1%.
TipRanks’-scored top Wall Street analysts see an average upside of 18% for Allianz’s stock in the next 12 months. ALV carries a TipRanks’ Smart Score rating of “Perfect 10” with a “Moderate Buy” recommendation:
To conclude, we believe that Allianz SE, with its strong market share, global reach, robust performance, and commitment to compensate its shareholders through dividends and buybacks, makes it an attractive choice for dividend investors.
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