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Arthur J. Gallagher Rides on Organic Growth, Expenses Rise

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Arthur J. Gallagher & Co. (AJG - Free Report) is well-poised for growth, given its strategic acquisitions, strong segmental performance and prudent capital deployment.

Shares of this Zacks Rank #3 (Hold) insurance broker have gained 7.6% in the past year, outperforming the industry’s increase of 4.7%.

The company has a decent earnings surprise history. It surpassed estimates in each of the trailing four quarters, the beat being 5.10%, on average.

The Zacks Consensus Estimate for 2020 and 2021 earnings per share is pegged at $3.93 and $4.19, indicating increase of nearly 7.6% and 6.5%, respectively from the year-ago reported figure. The expected long-term earnings growth rate is 10.9%, higher than the industry’s average of 8.5%.

Driving Factors

The company's top line has been increasing over the years owing to higher commissions, fees, supplemental and contingent revenues. The metric witnessed CAGR of 7.5% over the last four years (2015-2019). Higher fees, and commission, supplemental and contingent revenues from its Brokerage and Risk Management segments are likely to drive revenues in the days ahead.

The company’s Brokerage segment contributes a major portion of its revenues. Riding on strong demand for claim settlement and administration services, its Risk Management segment also contributed 14% to the company’s top-line growth over the past two years.

Arthur J. Gallagher’s revenues are geographically diversified with strong domestic and international operations. The firm has expanded its international operations through both acquisitions and organic growth. It derived 31% of its revenues from international markets, primarily Australia, Bermuda, Canada, the Caribbean, New Zealand and the U.K in 2019.  A number of strategic acquisitions have boosted its capabilities and diversified operations. These buyouts provide the company with incremental capabilities and services to assist clients across Australia, the UK, Europe and the United States.

Arthur J. Gallagher’s sound capital and liquidity position aid in prudent capital deployment. In the first quarter of 2020, the dividend was increased by nearly 4.6%, reflecting a five-year (2014-2019) CAGR of 3.62%.  Its dividend yield of 2% betters the industry average of 1.4%. The company also has 122.6 million shares remaining under its buyback authorization.

However, the company has been witnessing high costs due to higher compensation, amortization and operating expenses. Expenses increased at a four-year (2015 -2019) CAGR of 6.5%. Such costs tend to weigh on margins. Also, a high debt ratio and low interest serving capability raise financial risk.

Stocks to Consider

Some better-ranked stocks from the insurance industry are National General Holdings Corp. (NGHC - Free Report) , The Allstate Corporation (ALL - Free Report) and Palomar Holdings Inc. (PLMR - Free Report) . While National General Holdings carries a Zacks Rank #1 (Strong Buy), Allstate and Palomar carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

National General’s earnings beat estimates in two of the last four quarters and missed in the other two, the average positive surprise being 5.68%.

Allstate surpassed estimates in each of the last four quarters, with the average positive surprise being 18.45%.

Palomar surpassed estimates in two of the last four quarters, with the average positive surprise being 10.93%.

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