I first bought AXA (OTCQX:AXAHY) at $18, purchased more just over $10, even more around $11 and plunked down the final installment on my position a bit over $21. My paper gain is 80% and the dividend at my average price is a smidgen over 7%. AXA currently sits under $27 and has been bouncing between $25 and $28 over the past three months. Truthfully, I originally bought AXA simply because the price was too good to resist and then the price got even better, so I chased it down, which in retrospect looks smart, but may have just been an unwillingness to let go. With the recent release of full 2013 results, there is an opportunity to review overall performance and assess whether AXA holds sufficient long-term value to maintain its place in my portfolio.
AXA's 2013 revenue of $6.15B, a 10% rise, disappointed analysts who were expecting $6.58B. 2012 revenue was $5.57B. The market reaction was mildly negative and AXA's shares were down a few cents after the announcement then drifted back up. Unburdened by any forecast, I viewed the 10% rise as a positive. AXA's strategic plan called for 10% growth YOY by 2015 and this validates, albeit one year early, the overall direction of that plan. Earnings per share (EPS) also grew 10% to $2.54 and the dividend was raised 13% to $1.11. The dividend payout at 43.7% remains within AXA's forecasted target at 40-50% of earnings. This dividend payout raises my yield to 7.2% given my average price per share. Am I going to find a lot of other investments with a 7% payout capable of growing 10-15% a year into the indefinite future? I haven't found a lot of them yet. Of course, investors buying AXA for the first time will see a 4.2% dividend, but 4.2% is also not a number so easy to find. AXA's dividend is not a "firm" commitment, it is a target as a percentage of earnings and therefore may fluctuate as earnings rise or fall.
ROE was 14.8%, a slight improvement over 2012 and a solid, if unspectacular, number. I like solid, but unspectacular in a dividend stock, especially in an insurance company with asset management businesses. Debt gearing was down a bit and economic solvency was up a bit, both small pieces of good news. Debt gearing at 24% was 1 point ahead of the strategic plan and AXA's target is to stay within a 23-25% range through 2015. Free cash flow continues to improve, hitting $7.13B in 2013, a 10.6% improvement over 2012.
The overall strategic thrust of AXA appears to be on course. The goal was to reduce capital investment in mature markets, stabilize results where appropriate and re-focus resources on new markets with more growth potential. In addition, AXA, like everyone everywhere, wants to re-focus its technical infrastructure to extend its back office processes onto customer devices. $11.7B in capital has been pulled from mature markets since 2010 so this task of slowly winching the leviathan leeward is progressing apace.
Their mature markets are only growing at 1% annually so finding growth in other corners of the world remains a priority. The importance of this strategic capital reallocation process is apparent. P&C growth in the new markets is 15% CAGR. AXA reports, via a number of acquisitions, they are now the number 1 foreign insurer in China. The significance of this will obviously be dependent on the growth rate of China's middle class and AXA's ability to compete with both local and global competitors in Asia.
Given the share price is very near my view of fair value, I don't expect significant price appreciation near term, but anticipate AXA will continue to do well with some additional improvement as the Eurozone and the global economy improves. However, my assumption of fair value changes significantly as the 10% growth thesis is validated or repudiated. At 5% growth, I'm assuming fair value of $32; with 10% growth this increases to $44. AXA last hit $45 in 2007 during the height of the bull market, so there may be room for some multiple expansion down the road if it maintains the current growth rate. The trailing PE is about 9.6 which is reasonable for 5% growth, but a little light for 10%. I'll keep my current allocation to AXA with this level of performance, but if their China strategy appears to be gaining a solid foothold I would jump in more aggressively.
More importantly, AXA appears to be hitting milestones a little ahead of plan as they progress toward their goals. Despite its giant size, AXA has little detailed analyst coverage in the U.S. and trades over-the-counter. The lack of coverage may provide some buying opportunities as AXA flies slightly under the radar.