Allianz SE: This Well-Managed Insurance And Asset Giant Is Worth Investing, But There Is No Hurry

|
About: Allianz SE (ALIZF), AZSEY
by: The European View
Summary

The Allianz Group is one of the world's leading insurers and one of the world’s largest investors.

2018 was great and the outlook is promising. With a P/E ratio of 10.48 and a 10-year median P/E ratio of 10.59, the company is fairly valued.

The dividend yield of 4.4% and the dividend history indicate a fair valuation (maybe a slightly overvaluation).

My investment thesis for Allianz: the company is worth investing, but there is no hurry.

Introduction

This is another article about an uncovered or not that much covered stock here on Seeking Alpha: Allianz SE (OTCPK:ALIZF, AZSEY). Like some of my other articles, the purpose is to give you a sufficient picture and insights on the current situation in as few words as possible.

(Image Source: Goethe web page)

According to my three-grade rating, Allianz is worth investing but there is no hurry. While there are some business inherent risks, this is a well-managed and fair valued insurance and asset giant which has returned a lot of capital to its shareholders.

In this article, I will provide you an overview of the company profile. After that, I will analyze the upsides and downsides of a possible investment in Allianz.

Company profile

Allianz is a German company and is more than 120 years old. With 92 million customers in more than 70 countries, the company operates worldwide.

(Source: Allianz at a glance)

As illustrated above, the business consists of two segments:

  • Insurance business
  • Asset Management

As regards the insurance business, Allianz SE is one of the world's leading insurers:

(Source: Largest insurance companies worldwide as of June 2018, by market capitalization (in billion U.S. dollars))

The insurance business can be further subdivided into the following segments:

  • Property & Casualty Insurance - This segment contains the insurance of personal property, like home or automobile and the cover of personal liability.
  • Health & Life Insurance - Furthermore, Allianz offers international health, life and disability insurance, as well as a wide range of health and protection services to private individuals, families, organizations and partners.
  • Business Insurance - In addition, Allianz offers business insurance and risk consulting for companies in all industries, from large corporations to small and medium-sized businesses.

Next, on to the insurance business. Allianz is one of the world’s largest investors and asset managers with more than 92 million retail and corporate customers, managing around 673 billion euros on behalf of its insurance customers. In addition, the asset managers PIMCO and Allianz Global Investors manage more than 1.4 trillion euros of third-party assets:

(Source: Bloomberg)

Given the leading position in the insurance and investor business, the share allocation is surprising. While there are half a million German shareholders, foreign shareholders are clearly a minority:

(Source: Share allocation)

The upsides

China as potential long-term growth engine

By protecting others from financial harm, Allianz offers products that most people need. Therefore, the business is quite conservative. On the other hand, there is often a lack of growth opportunities in such markets.

But at the end of last year, Allianz received an approval for the establishment of China’s first fully-owned foreign insurance holding company. This is very good news for Allianz, because it is one of the first western companies to gain a big foothold in the Chinese market. Comparing the gross written premiums generated by insurers across the globe last year, China offers a lot of growth potential:

(Source: Gross written premiums Life Insurance in China)

(Source: Gross written premiums Property & Casualty Insurances in China)

(Source: Gross written premiums Life Insurance in USA)

(Source: Gross written premiums Property & Casualty Insurances in China)

Fundamentals and performance

For the current fiscal year, Allianz is valued at 10.48 times earnings. With a 10-year median P/E ratio of 10.59, the company is fair valued. In recent years, the P/E ratio has not been volatile. This indicates that the stock price is close to its average without major extreme fluctuations.

(Source: P/E Ratio 2012-2018)

Since the end of the financial crisis, the share price has almost tripled in the meantime. However, the stock underperformed the Dow Jones and the S&P 500 Index but outperformed the German benchmark index DAX.

(Source: Stock performance)

Given this performance, it should be remembered that Allianz has paid tons of dividends. Considering that the 5-year average yield was a respectable 5%, you need to add way more percentages to the share price performance.

Furthermore, the company looks quite cheap compared to the S&P 500, Dow Jones and Dax: The current S&P 500 P/E ratio is 21.11, the current Dow Jones P/E ratio is 17.57 and the current DAX ratio is 13.07. Accordingly, the P/E ratio of Allianz is very reasonable. Note, however, that insurers generally have a slightly lower P/E ratio.

Outlook

2018 was a good year for Allianz. The company met its performance targets in all segments and maintained a high level of capital strength:

(Source: Key figures fiscal year 2018)

The company is therefore on a growth course and does not intend to stop it.

Therefore, growth for the coming year is expected to be less than 10%, but stable and quite good for a mature business:

(Source: Outlook 2019)

Long term, Allianz has set clear ambitions for 2021:

(Source: Strategy for 2021)

CEO Oliver Bäte has a clear vision on how the company will achieve these targets. After passing the "3+One Agenda" and "Renewal Agenda" successfully, the actual agenda is called "Simplicity wins". CEO Bäte aligns the three-year plan fully on the digital transformation. This transformation is driven by:

  • Continuous productivity gains through simplification and harmonization of insurance services;
  • Simple and intuitive products;
  • Empathic service and frontline empowerment;
  • Leveraging of AI; and
  • Focussing on direct platform and digital ventures and partnership.

(Source: 4Q 2018 results)

Return of capital to shareholders

In the meantime, Allianz returns a lot of capital to its shareholders with dividends and share buybacks.

Allianz offers attractive dividends to shareholders. The highlights of the dividend policy are:

  • Regular payout is 50% of Allianz net income (attributable to shareholders).
  • In the interest of dividend continuity, the objective is to keep the dividend per share at least at the level paid in the previous year.
  • The actual payout ratio is reasonable at 47%.
  • The 5-year growth rate of the dividend is 12.2%.
  • The company has an impressive dividend history but is not a Dividend Aristocrat:

(Source: Dividend history)

Note, however, that - as usual in Germany - the payment is made only once a year (usually in April or May) and not quarterly. For 2019, the dividend yield was 4.4%. At the moment, the dividend yield is within the last 6-year average of 5%. This also indicates that the stock is fair valued, maybe slightly overvalued:

(Source: Dividend yield)

In addition to dividends, the company returns capital to its shareholders through share buybacks. Allianz executed three share buyback programs with a volume of 6 billion euros in the period from February 17, 2017, until September 4, 2018.

On February 14, 2019, Allianz resolved on a new share buyback program. The volume of the new program will amount to up to EUR 1.5 billion. The program started on March 4, 2019, and shall be finalized by December 31, 2019 at the latest. The company will cancel all repurchased shares.

Downsides

There are only two real downsides, and both are business inherent risks:

  • Damage events of high magnitude
  • Decreasing interest rates.

The insurance business can be disadvantageous for profit development in case of damage events of high magnitude. Every year, natural disasters or accident cost hundreds of billions of dollars globally - and the cost is rising. For example, Allianz is one of the companies that insured Boeing’s (BA) airline manufacturer. According to Bloomberg, settling claims from two airplane crashes could cost $1 billion or even more. Therefore, insurers need a lot of cash or other liquid assets to back up potential claims.

In addition, like every insurance company, Allianz has substantial investments in interest-sensitive assets. On the other hand, there are old liabilities with high interest rates. Accordingly, it is difficult for the company to earn this interest through its own investments. Unfortunately, rising interest rates are no longer expected. This could slow down the growth plans. But these are problems that affect the business of every insurance company. Allianz has proven that it can face these developments and grow at the same time.

Takeaway

I will use a three-grade rating for this series. Its purpose is to ensure that readers recognize at first glance whether a company might or might not be worth investing. The three steps rating at a glance:

Buy the jewel rather now than tomorrow if:

  • There are no downsides and the company has growth potential.*
  • The upsides outweigh the downsides and the company has enormous growth potential.

Worth an investment (maybe later after a further look) if:

  • The upsides outweigh the downsides.
  • The upsides are equal to downsides but the company has growth potential.

No thanks if:

  • No growth potential in the long term.
  • The downsides outweigh the upsides.

*Of course, the growth potential is a part of the upsides, but it is also crucial in my final consideration.

The grade for Allianz:

For me, Allianz is worth an investment, but there is no hurry. For my grade is crucial:

  • The upsides outweigh the downsides.
  • Allianz is a very well-managed and fair-valued insurance and asset giant with good fundamentals and a pretty good dividend.
  • Management has a great vision to achieve the expected growth.
  • Nevertheless, there is no hurry - the next dividend will be paid next year in May, the stock is not undervalued, and all the upsides are priced in.

Additional notes for the dividend payout

Non-German shareholders will be subject to a deduction of tax at source at a rate of 26.375% by the bank paying out the dividend. However, the withholding tax rate may be reduced in accordance with an applicable income tax treaty. The difference between the tax actually withheld, including the solidarity surcharge, and the rate that applies under the double taxation treaty is reimbursed to the shareholder by the Federal Central Tax Office (Bundeszentralamt für Steuern) upon application. Note that the reimbursement may be subject to further conditions.

If you enjoyed this article and wish to receive updates on my latest research, click "Follow" next to my name at the top of this article, and check "Get email alerts".

Disclosure: I am/we are long AZSEY, ALIZF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.