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Aon's Solid Cash Flows Back Inorganic Growth, Debts Hurt

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Aon plc (AON - Free Report) offers risk management services, insurance and reinsurance brokerage, human resource consulting and outsourcing services worldwide. The company has been able to strengthen its position in the market on the back of robust inorganic growth as well as a strong capital position.

Aon’s operating cash flow has been strong over the years and has enabled it to deploy capital in an effective manner. It has been enhancing shareholders’ value through dividend payments and share repurchases.

In the last one year, the stock has gained 26%, outperforming the industry’s rally of 18%. This reflects shareholders’ confidence in the stock.

Aon has witnessed substantial inorganic growth over the last three years. Its buyouts are mainly aimed at expanding the health and benefits business as well as risk and insurance solutions operations. Strategic alliances also bolstered Aon’s scale of business. The acquisition of Admix and the international benefit brokerage portfolio of the Mayfair group are worth a mention here. These initiatives have significantly paves the way for the company’s long-term growth.

Aon continues to divest non-core operations to streamline its business. In the first half of 2017, it sold off its benefits administration and HR BPO platform to Blackstone Group. This not only helped in avoiding non-core expenses but generated higher return on equity.

Aon’s expense management programs impress. Operating expenses started declining since 2015. Despite a nominal increase in the first half of 2017, the divestment of non-core HR business is likely to reduce Aon’s overall costs in the coming quarters, in turn, aiding the margin growth.

However, the company’s operations suffer from a high debt level. Aon has been issuing debts to repay outstanding debts which resulted in mounting level of long-term borrowings. Consequently, interest expenses started rising since 2013, at a three-year average growth rate of 7.6%. This, in turn, is expected to weigh on Aon’s profitability.

Moreover, as a global corporation, Aon has been facing unfavorable impact of foreign exchange volatility on its earnings per share and revenues since 2012. This may lead to earnings volatility.

This Zacks Rank #3 (Hold) insurance broker alsolooks expensive at the current level. Looking at the company’s forward Price-to-Earnings ratio, investors may not want to pay any further premium. It currently has a one-year forward P/E ratio of 21.3, which is above its range’s median of 17.7 and near the highest point of 21.6. It is also significantly higher than the industry average of 16.70 as well as the S&P 500’s average of 19.2.

Stocks to Consider

Some better-ranked stocks from the insurance industry are First American Corporation (FAF - Free Report) , CNO Financial Group, Inc. (CNO - Free Report) and Argo Group International Holdings, Ltd. , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

First American Corporation provides financial services. The company delivered positive surprises in all the last four quarters with an average beat of 12.6%.

CNO Financial develops, markets and administers health insurance, annuity, individual life insurance and other insurance products for senior and middle-income markets in the United States. The company delivered positive surprises in three of the last four quarters with an average beat of 6.7%.

Argo Group underwrites specialty insurance and reinsurance products in the property and casualty market worldwide. The company delivered positive surprises in all the last four quarters with an average beat of 26.5%.

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