Aon's Business Strengthening Initiatives, Buyouts Impress

On Jul 4, 2016, we issued an updated research report on Aon Plc (NYSE:AON) .

Aon is well poised for long-term growth on the back of its core business strengthening initiatives, cost savings from its restructuring programs, robust cash flow position and efficient capital deployments. The company’s expected long-term growth rate is currently pegged at 11%.

The insurer undertakes strategic buyouts and partnerships globally to strengthen its base. These have helped in enhancing the insurer’s professional liability portfolio, in turn, paving the way for more client acquisitions. The deals also have expanded Aon’s health and benefits business along with flood insurance solutions as well as risk and insurance solutions.

In order to boost its operational strength, Aon has divested non-core operations from Risk Solution and HR Solution business segments. The divestures not only resulted in a huge pre-tax gain but also drove operating leverage of the company.

Additionally, Aon undertakes various restructuring plans in order to control mounting expenses and generate savings. Previous initiatives like these have strengthened the company’s financials and resulted in year-after-year decrease in operating expenses.

Aon boasts a strong financial position with its operating cash flow increasing at a five-year CAGR of 21%. A decline in pension contribution and tax payment, along with an increase in working capital, has helped strengthen the insurer’s cash position. Also, the company’s investments in innovative solutions position it well to generate higher cash flows in the long term. This in turn, will help the insurer in efficient capital deployment though consistent share repurchase and dividend increase in order to create value for shareholders. Factors like these make the stock an attractive pick for yield seeking investors.

In fact, the Zacks Consensus Estimate moved up 6.4% to $6.60 for 2016 and 11.4% to $7.32 for 2017 over the last 90 days.

However, an increase in Aon’s commercial paper outstanding resulted in a higher debt-to-capital ratio. This high level of leverage increased the company’s borrowing costs and financial risk.

The worldwide strategic operation also exposes Aon to economic volatility and foreign exchange rate fluctuations. Though Aon’s bottom line is expected to be hurt by such negatives, stable currency rate and a negligible impact from Forex fluctuation for the rest of 2016 should mitigate the risks to some extent.

Moreover, Aon faces intense competition from insurers and re-insurers who operate in the market independently. This increased competition is likely to result in market share loss, thereby hampering the company’s top-line growth.

With respect to the surprise trend, this Zacks Rank #2 (Buy) insurer delivered positive surprises in all of the last four quarters.

Other Stocks to Consider

Investors interested in insurance brokers can also look at Blue Capital Reinsurance Holdings Ltd. (NYSE:BCRH) , Brown & Brown Inc. (NYSE:BRO) and Hannover Rück SE (OTC:HVRRY) . Each of these stocks hold the same Zacks Rank as Aon.