It’s only natural that many investors, especially those who are new to the game, prefer to buy shares in ‘sexy’ stocks with a good story, even if those businesses lose money. But as Peter Lynch said in One Up On Wall Street, ‘Long shots almost never pay off.’
In contrast to all that, I prefer to spend time on companies like Hanover Insurance Group (NYSE:THG), which has not only revenues, but also profits. While profit is not necessarily a social good, it’s easy to admire a business than can consistently produce it. Loss-making companies are always racing against time to reach financial sustainability, but time is often a friend of the profitable company, especially if it is growing.
How Quickly Is Hanover Insurance Group Increasing Earnings Per Share?
As one of my mentors once told me, share price follows earnings per share (EPS). Therefore, there are plenty of investors who like to buy shares in companies that are growing EPS. We can see that in the last three years Hanover Insurance Group grew its EPS by 12% per year. That’s a good rate of growth, if it can be sustained.
I like to take a look at earnings before interest and (EBIT) tax margins, as well as revenue growth, to get another take on the quality of the company’s growth. While we note Hanover Insurance Group’s EBIT margins were flat over the last year, revenue grew by a solid 6.5% to US$4.7b. That’s a real positive.
Fortunately, we’ve got access to analyst forecasts of Hanover Insurance Group’s future profits. You can do your own forecasts without looking, or you can take a peek at what the professionals are predicting.
Are Hanover Insurance Group Insiders Aligned With All Shareholders?
We would not expect to see insiders owning a large percentage of a US$5.2b company like Hanover Insurance Group. But we do take comfort from the fact that they are investors in the company. To be specific, they have US$41m worth of shares. That shows significant buy-in, and may indicate conviction in the business strategy. Even though that’s only about 0.8% of the company, it’s enough money to indicate alignment between the leaders of the business and ordinary shareholders.
It’s good to see that insiders are invested in the company, but are remuneration levels reasonable? A brief analysis of the CEO compensation suggests they are. I discovered that the median total compensation for the CEOs of companies like Hanover Insurance Group with market caps between US$4.0b and US$12b is about US$6.9m.
Hanover Insurance Group offered total compensation worth US$4.2m to its CEO in the year to December 2018. That seems pretty reasonable, especially given its below the median for similar sized companies. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. It can also be a sign of a culture of integrity, in a broader sense.
Should You Add Hanover Insurance Group To Your Watchlist?
One important encouraging feature of Hanover Insurance Group is that it is growing profits. Earnings growth might be the main game for Hanover Insurance Group, but the fun does not stop there. With a meaningful level of insider ownership, and reasonable CEO pay, a reasonable mind might conclude that this is one stock worth watching. Now, you could try to make up your mind on Hanover Insurance Group by focusing on just these factors, or you could also consider how its price-to-earnings ratio compares to other companies in its industry.
You can invest in any company you want. But if you prefer to focus on stocks that have demonstrated insider buying, here is a list of companies with insider buying in the last three months.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.