Allstate Looking Very Shareholder-Friendly With Buybacks, Dividend Hike

Argus reiterated its Buy rating on Allstate Corp (NYSE: ALL) and raised its price target by $2 to $76 after the company improved its combined ratio in the first half of 2016, a sign of improving profitability.

Rating And Expectations

Also, Allstate is becoming shareholder friendly, as it recently raised its quarterly dividend by 10 percent to $0.33 per share, for a yield of about 1.9 percent. Argus' dividend forecasts are $1.32 for 2016 and $1.44 for 2017.

The company repurchased $379 million shares in the second quarter. As of June 30, it had $1.2 billion remaining on its $1.5 billion buyback authorization, which it expects to complete by November 2017.

Related Link: Allstate Announces July Catastrophe Loss Estimate Of $253 Million

For the second quarter, the overall underlying combined ratio improved to 88.6 from 89.1. By business line, the Allstate underlying combined ratio was 100.1, while the Encompass ratio was 92.8 and the Esurance ratio was 104.8.

"This is impressive given the high level of recent catastrophe losses from hailstorms in Texas. Looking ahead, we believe that Allstate has the ability to raise prices, cut costs, and improve underwriting. We expect management to continue to boost profitability and grow policies in force," analyst Jacob Kilstein wrote in a note.

Although Allstate management does not provide detailed earnings guidance, it expects a 2016 underlying combined ratio of 88–90. The analyst expects ROE to improve to about 11 percent over the next year from the 8 percent recorded in the second quarter.

Further Justification

That said, Kilstein cut his 2016 EPS estimate to $4.38 from $4.59, reflecting record cat losses in the first half of the year. However, the analyst raising his 2017 EPS estimate to $6.06 from $5.79, as he expects higher pricing and cost cuts to boost ROE.

Over the past year, the stock has outperformed, rising 18 percent compared to a gain of 10 percent for the S&P 500 index. Shares appear attractively valued at 15.7-times 2016 EPS estimate, below the peer average of 23.0.

"Despite solid appreciation over the past year, we believe that the stock continues to provide investors with a favorable entry point," Kilstein noted.

At time of writing, shares of Allstate were up 0.10 percent to $68.69.

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