Allstate: A Safe Stock During Volatile Times, Which Will Benefit From Rising Rates

Allstate NYSE: ALL is an American Insurance Company that provides a broad range of financial products, including auto, marine and home insurance. In addition, they also offer wealth planning services and financial products that mainly target retirement.

Investment Thesis

Allstate’s stock looks quite attractive with its current valuation and the broader economic conditions. Allstate is in a market that is very competitive, with the high barriers to entry, which makes it an attractive choice for a defensive stock. The case for investing in the stock further improves as return on investments increase due to higher interest rates. Finally, Allstate has also continued to strengthen its business through synergies gained from various acquisitions, thereby ensuring it remains competitive for the future.

An overview of Allstate’s business

Allstate’s primary business is the insurance sector. It competes with other insurance providers such as State Farm and Allstate. It is one of the market's more expensive insurance providers, with both its home and auto segments charging a rate that is higher than their competitors

Allstate's is able to charge the prices due to a higher level of product satisfaction, which stems from Allstate’s personalized services that it provides customers, services such as roadside assistance etc. As a result, Allstate has carved out a niche for itself within the insurance market, where product differentiation remains the most significant factor for competition. Despite all these factors, Allstate retains a healthy 10-11% market share.

Financial Outlook and Valuation

Allstate is likely to benefit due to interest rates rising, which should help offset some of the effects of higher payouts. COVID previously helped the company’s margins as lower payouts meant profitability improved in 2021. However, as things normalize, proceed payments have normalized as well with combined ratio rising to 98.9%, up 14.9% from the previous year. The increase has affected margins, which came in lower than the previous year during the early part of the year.

The auto-insurance sector is likely to grow around 3% for the next 4-5 years, and the non-life insurance division sector is expected to grow to around 6% for the year. Allstate is projected to bring in revenue of $48-49 billion for the year that could rise slightly to $50-51 billion as premium collection increases in the latter quarters. Otherwise, revenue would be slightly down from the $50 billion in 2021. Meanwhile, operating margins are expected to come in at 10%, and net profit margins might come in at around 7%. If net profit margins increase to 8-9% due to an increase in return on investment on premiums, the stock may rise to $128-$130 per share.

Allstate currently trades at a relatively moderate valuation with a forward price-to-earnings (PE) of 10x and a dividend yield of 2.8%. And according to the dividend discount model, Allstate’s stock is currently valued at $121 per stock, which would point to the stock being fairly valued. Moreover, should dividends increase during the latter part of the year, the stock could also rise to $128-$130 per share, which would provide a reasonable rate of return for a defensive stock.

Risks to general insurance

Large payments and adverse events remain risks that may affect insurance providers.  Usually, losses from these proceeds are capped as a result of re-insurance, but remain a risk for the stock. Furthermore, a slowdown in the economy and rising rates could affect insurance-related goods such as home and automobile demand, which would, in turn would affect demand for insurance products.

Should Allstate be a part of your portfolio?

The company remains a relatively safe option, and the operations are likely to remain steady even during a recession. Currently, the dividend yield remains attractive, and the outlook is also reasonable. Unless there is an unprecedented adverse event, insurance companies tend to have blue-chip-like qualities that allow them to overcome volatile markets without any long-term damage. But, on the other hand, the stock is unlikely to outperform the broader market since the insurance industry tends to move slowly. Consider the stock if you would like a relatively-safe blue-chip stock as a part of a defensive portfolio during these unique times.