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Brown & Brown (BRO) Rides on Acquisitions, Cost Woes Persist

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Brown & Brown’s BRO remains well poised for growth driven by organic and inorganic growth, solid capital position and prudent capital deployment.

Brown & Brown boasts an impressive growth record backed by organic and inorganic efforts. Strategic mergers and acquisitions have enabled it to expand its operations.  In the first nine months of 2019, the company closed 18 transactions with annualized revenues of $86 million.

The company has acquired 500 insurance intermediary operations in more than two decades. It remains focused on making investments to drive organic growth and margin expansion. Its solid capital position has enabled it to widen its capabilities with acquisitions and extend its geographical presence.

Banking on strong capital and liquidity position, the company deploys capital effectively via share repurchases and dividend hikes to enhance shareholder value. Recently, the company raised dividend by 6.25%, which marks the 26th yearly dividend hike. However, the company’s dividend yield of 0.9% compares unfavorably with the industry’s yield of 1.4%. At present, the company has $500 million under its authorization.

Estimates for Brown & Brown have been revised upward over the past 30 days, reflecting analysts’ confidence in the stock. The Zacks Consensus Estimate for 2019 earnings per share has moved up 0.7% in the said time frame. The company also has a decent history of beating estimates in three of the last four quarters with the average being 6.12%.

Recently, there have been a number of acquisitions in the insurance brokerage industry, given the significant capital available. Arthur J. Gallagher & Co. (AJG - Free Report) acquired Halifax, Nova Scotia-based Sinclair Billard and Weld Limited, and CJM Solutions + Inc., dba SBW Employee Benefits. Also, Willis Towers Watson WLTW completed the acquisition of Risk Capital Advisors Pty Ltd.

The Zacks Consensus Estimate for 2019 and 2020 earnings per share is pegged at $1.40 and $1.51, indicating increase of nearly 13.8% and 8.3%, respectively from the year-ago reported figure. The expected long-term earnings growth rate is 10%. It has a favorable Growth Score of B.

Shares of this Zacks Rank #3 (Hold) have gained 42.6% year to date, outperforming the industry’s increase of 37.8%. The company’s efforts to ramp up growth and its solid capital position should continue to drive shares higher.

However, escalating expenses due to increased compensation and operating expenses weigh on operating margin. Also, trade regulations, profit repatriation regulations and foreign currency exchange rate fluctuations remain key concerns for Brown & Brown.

Stock to Consider

Another better-ranked stock from the insurance brokerage sector is Fanhua Inc. FANH sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Fanhua distributes insurance products and provides property and casualty insurance, life insurance and participating insurance products in China. The company beat the Zacks Consensus Estimate in three of the last four reported quarters, the average beat being 13.44%.

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