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Is Assurant, Inc.'s (NYSE:AIZ) Recent Price Movement Underpinned By Its Weak Fundamentals?
It is hard to get excited after looking at Assurant's (NYSE:AIZ) recent performance, when its stock has declined 16% over the past month. It seems that the market might have completely ignored the positive aspects of the company's fundamentals and decided to weigh-in more on the negative aspects. Long-term fundamentals are usually what drive market outcomes, so it's worth paying close attention. Particularly, we will be paying attention to Assurant's ROE today.
Return on equity or ROE is a key measure used to assess how efficiently a company's management is utilizing the company's capital. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.
Check out our latest analysis for Assurant
How Do You Calculate Return On Equity?
The formula for return on equity is:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity
So, based on the above formula, the ROE for Assurant is:
6.5% = US$277m ÷ US$4.2b (Based on the trailing twelve months to December 2022).
The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.07.
Why Is ROE Important For Earnings Growth?
We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.
A Side By Side comparison of Assurant's Earnings Growth And 6.5% ROE
When you first look at it, Assurant's ROE doesn't look that attractive. We then compared the company's ROE to the broader industry and were disappointed to see that the ROE is lower than the industry average of 12%. Accordingly, Assurant's low net income growth of 3.7% over the past five years can possibly be explained by the low ROE amongst other factors.
As a next step, we compared Assurant's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 14% in the same period.
Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. What is AIZ worth today? The intrinsic value infographic in our free research report helps visualize whether AIZ is currently mispriced by the market.
Is Assurant Efficiently Re-investing Its Profits?
Despite having a normal three-year median payout ratio of 31% (or a retention ratio of 69% over the past three years, Assurant has seen very little growth in earnings as we saw above. So there might be other factors at play here which could potentially be hampering growth. For example, the business has faced some headwinds.
Additionally, Assurant has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 19% over the next three years. Accordingly, the expected drop in the payout ratio explains the expected increase in the company's ROE to 15%, over the same period.
Summary
Overall, we have mixed feelings about Assurant. While the company does have a high rate of profit retention, its low rate of return is probably hampering its earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.
What are the risks and opportunities for Assurant?
Assurant, Inc., together with its subsidiaries, provides business services that supports, protects, and connects consumer purchases in North America, Latin America, Europe, and the Asia Pacific.
Rewards
Trading at 45.5% below our estimate of its fair value
Earnings are forecast to grow 33.44% per year
Risks
Significant insider selling over the past 3 months
Profit margins (2.7%) are lower than last year (5.9%)
Further research on
Assurant
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
About NYSE:AIZ
Assurant
Assurant, Inc., together with its subsidiaries, provides business services that supports, protects, and connects consumer purchases in North America, Latin America, Europe, and the Asia Pacific.
Established dividend payer and good value.
