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Why Should You Retain Aon (AON) Stock in Your Portfolio?

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Aon plc (AON - Free Report) has been in investors’ good books on the back of rising revenues and inorganic growth strategies.

Aon has been witnessing a steady revenue stream over the last many years. This can be attributed to its solid fundamentals, such as expansions through buyouts and collaborations, divestitures and a solid financial position. Given its constant efforts to boost growth, we expect the top line to be consistently driven in the upcoming quarters.

The company boasts an attractive earnings surprise history, having outpaced the Zacks Consensus Estimate in all the trailing four quarters, the average being 0.6%. This trend of consecutive estimate beats corroborates its operational excellence.

Recently, the company reported third-quarter 2019 adjusted operating earnings of $1.45 per share, beating the Zacks Consensus Estimate by 1.4% and also growing 10.7% year over year owing to higher revenues. The quarter also witnessed a dip in operating expenses and solid segmental contributions, namely Commercial Risk Solutions, Reinsurance Solutions, Data and Analytic Services plus Health Solutions.

Its return on equity — a profitability measure — is 51.6%, better than the industry average of 25.9%. Further, the metric reflects the company’s efficiency in utilizing its shareholders’ funds.

Over the years, acquisitions have been instrumental in building Aon’s growth trajectory. Its buyouts mainly aim at expanding its health and benefits business, flood insurance solutions, and risk and insurance solutions operations. The company also formed several alliances to enhance its capacity, thereby emerging as one of the largest insurance brokers.

In 2017 and 2018, Aon completed a total of 17 and eight acquisitions, respectively, to add to its portfolio. It recently agreed to acquire CoverWallet, the leading digital insurance platform for small and medium-sized businesses (SMBs). This integration would provide Aon an access to the fast-growing, digital insurance market for SMBs, which is valued at more than $200 billion in premium.  We believe, these deals are likely to accelerate long-term growth.

The company has also been divesting its non-core operations to streamline business. From 2010 to 2015, it sold 27 businesses from the Risk Solutions segment and seven businesses in the HR Solutions segment that generated a substantial pre-tax gain. Additionally, the company divested a business each from its Risk and HR Solutions segments in 2016 and its benefits administration and HR BPO platform to Blackstone in 2017. All these helped the company generate better return on equity and enabled it focus on its core business.

However, it has been issuing debts occasionally to repay dues. Long-term debt has been persistently mounting since 2014 due to an increase in commercial paper outstanding. A high level of leverage escalates the company’s borrowing costs. This, in turn, induced an elevated level of interest expenses. Heavy debt might result in high interest burden, thereby weighing on the company’s margin.

Its long-term growth rate is pegged at 12%, above its industry's metric of 11%.

The Zacks Consensus Estimate for current-year earnings is pegged at $9.13, indicating a rise of 11.9% from the prior-year reported number on revenues of $11 billion, implying 2.2% growth from the year-ago reported number.

For 2020, the Zacks Consensus Estimate for earnings stands at $10.36 on $11.64 billion revenues, suggesting a respective 13.4% and 5.8% increase from the year-earlier reported figures.

Shares of this Zacks Rank #3 (Hold) company have rallied 24.8% in a year’s time, outperforming its industry’s growth of 23.6%.

Stocks to Consider

Investors interested in the insurance industry might look into some better-ranked stocks like Kemper Corporation (KMPR - Free Report) , Erie Indemnity Company (ERIE - Free Report) and Radian Group Inc. (RDN - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Kemper Corporation is a diversified insurance holding company. The company managed to pull off average four-quarter positive surprise of 16.4%.

Erie Indemnity Company provides sales, underwriting and policy issuance services for the policyholders on behalf of the Erie Insurance Exchange. It has average four-quarter positive surprise of 4.9%.

Radian Group engages in mortgage and real estate services business in the United States. The company delivered average beat of 10.1% in the last four quarters.

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