Arthur J. Gallagher (AJG) has emerged as an exciting stock pick in the insurance brokerage industry. Founded almost a century ago, the company has become one of the largest insurance brokers in the nation, outperforming the S&P 500 index by more than 3% since its IPO in 1984.
Over the past five years, Gallagher has doubled its earnings per share and delivered an impressive annualized return of 27%, far surpassing the S&P 500’s 12% return. The stock, currently priced at $218.23, is expected to benefit from higher interest rates and accelerating policy renewals, leading to projected record profits of $8.78 per share this year. Despite its gains, the stock remains attractively valued at 22.8 times forward earnings, in line with its five-year average.
Investment management firm Campbell Newman recently initiated a position in AJ Gallagher, considering it an attractive opportunity. The insurance brokerage model that Gallagher operates has several appealing features. As an intermediary between insurers and clients, Gallagher doesn’t take on risk or pay out claims itself. Instead, it generates revenue from fees paid as a percentage of premiums. These fees have been rising with inflation, resulting in a capital-light model. The company has expanded its business through strategic acquisitions, showcasing its ability to extract increasing value from its growing scale.
Moreover, Gallagher’s portfolio of highly liquid premiums and claims is invested in U.S. Treasuries, earning more attractive yields with the rise in interest rates. Despite its acquisitions, the company has managed to decrease its debt-to-capital and debt-to-equity ratios. Additionally, Gallagher benefits from $750 million of clean-energy tax credits, further bolstering its cash flow.
Gallagher’s business outlook appears promising. The company expects organic growth at the high end of its 7% to 9% range for the full year. Management has reported significant growth in primary insurance-renewal premiums, with second-quarter rates increasing 11% compared to the first quarter and all of 2022. Analysts anticipate strong second-quarter results, with earnings per share expected to reach $1.86 on revenue of $2.36 billion, surpassing last year’s $1.70 per share and $2 billion revenue.
Analysts believe that Gallagher’s position in the property and casualty sector, combined with its ability to capture market share through new business wins and acquisitions, will enable sustained top-line growth and margin expansion. Even in the event of a recession, the company’s earnings per share have consistently increased, showcasing its resilience. Additionally, Gallagher’s dividend payout, which has seen consistent growth over the past five years, offers stability for investors.
Overall, Arthur J. Gallagher’s stock pick presents an exciting opportunity in the insurance brokerage industry. With its impressive track record, solid business model, and positive market trends, the company is poised for continued growth and success. Investors may find value in initiating a position in AJ Gallagher, benefiting from its strong performance and potential for further gains.
