Back to top

Image: Bigstock

AFG Rallies 24.4% YTD but Lags Industry: How to Play the Stock

Read MoreHide Full Article

Shares of American Financial Group, Inc. (AFG - Free Report) have rallied 24.4% year to date, outperforming the Finance sector’s return of 24.1%. It, however, underperformed the industry’s growth of 34.3% and the S&P 500 composite’s return of 26.5%.

Zacks Investment Research
Image Source: Zacks Investment Research

With a market capitalization of $12.41 billion, the average volume of shares traded in the last three months was 0.3 million.

American Financial closed at $147.93 on Wednesday, near its 52-week high of $150.19. This proximity underscores investor confidence. It has the ingredients for further price appreciation. The stock is trading above the 50-day and 200-day simple moving averages (SMA) of $136.17 and $130.54, respectively, indicating solid upward momentum. SMA is a widely used technical analysis tool to predict future price trends by analyzing historical price data.

AFG’s Growth Projection Encourages

The Zacks Consensus Estimate for American Financial’s 2024 earnings per share indicates a year-over-year increase of 1.6%. The consensus estimate for revenues is pegged at $8.17 billion, implying a year-over-year improvement of 8.5%. 

The consensus estimate for 2025 earnings per share and revenues indicates a year-over-year increase of 8.8% and 7.5%, respectively, from the corresponding 2024 estimates.

Factors Acting in Favor of AFG

New business opportunities, increased exposure and a good renewal rate environment, coupled with additional crop premiums from the Crop Risk Services acquisition, poise AFG well for growth.

American Financial, a niche player in the P&C market, is likely to benefit from strategic acquisitions and improved pricing. Improved industry fundamentals drive overall growth.

American Financial witnessed average renewal pricing across the entire P&C Group. It intends to maintain satisfactory rates in P&C renewal pricing going forward. AFG expects to achieve overall renewal rate increases in excess of prospective loss ratio trends to meet or exceed targeted returns.

Its combined ratio has been better than the industry average for more than two decades. Specialty niche focus, product line diversification and underwriting discipline should help AFG outperform the industry’s underwriting results.

Wealth Distribution

The property and casualty insurer has increased its dividend for 18 straight years apart from paying special dividends occasionally. This reflects its financial stability, which stems from robust operating profitability in the P&C segment, stellar investment performance and effective capital management.
The insurer expects its operations to continue to generate significant excess capital throughout the remainder of 2024, thus providing ample opportunity for additional share repurchases or special dividends over the next year. Notably, the 10-year compound annual growth rate for the company's regular annual dividends stands at an impressive 12.4%. This track record underscores its prudent financial management and stability. The dividend yield is 2.1%, better than the industry average of 0.2%.

AFG Shares are Expensive

American Financial shares are trading at a price-to-book multiple of 2.64, higher than the industry average of 1.63. However, AFG shares are cheaper when compared with other insurers like The Travelers Companies, Inc. (TRV - Free Report) , CNA Financial Corporation (CNA - Free Report) and Cincinnati Financial Corporation (CINF - Free Report) .

To Conclude

American Financial’s prudent capital deployment, increased exposures, good renewal rate environment and improved combined ratio make it an attractive stock.

Despite its expensive valuation, American Financial should benefit from strategic acquisitions, new business opportunities, stronger underwriting profit and favorable growth estimates. It is, therefore, wise to hold on to this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Published in