uploads///PGR valuation

How Progressive Commands Premium Valuations on Higher Margins

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Oct. 27 2015, Updated 10:05 a.m. ET

Dividends and repurchases

Progressive (PGR) reported 3Q15 earnings per share of $0.47, a 6% decrease over the third quarter of 2015. The company recorded 12% growth in its net premium and 15% growth in its investment income.

Progressive reported net realized losses on securities of $15.8 million, down from gains of $38.2 million in 3Q14. Its combined ratio improved by a marginal three basis points to 92.8% in 3Q15.

The company rewards its shareholders with dividends, share repurchases, as well as capital appreciation. It has a dividend yield of 2.1%. Here’s how its peers compare:

  • American International Group (AIG) – 0.8%
  • Travelers Companies (TRV) – 2.1%
  • Mercury General (MCY) – 4.4%
  • Ace (ACE) – 2.6%
  • Allstate (ALL) – 1.7%

Together, these companies form 1.1% of the SPDR S&P 500 ETF (SPY).

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Improving valuations

Historically, Progressive has commanded a premium valuation compared to its peers, mainly due to the improving automobile sector and the company’s higher take-up in the auto insurance segment. Currently, Progressive is valued at 16.3x on a one-year forward earnings basis. Its peers trade at an average of 13.6x. The stock was trading at 16.6x in October 2014 while its peers were trading at 13.4x.

The company’s stock has appreciated by 31% over the past year, with a market capitalization of $19 billion. With the acquisition of ARX Holding, Progressive entered the property lines market. It’s expected to generate higher returns in its commercial lines and to sustain returns in its personal lines.

The investment income level declined from the second quarter, as per expectations. Considering the dividend yield, stronger penetration in auto insurance, diversification through an acquisition of ARX holdings, and a growing commercial lines business, we see that Progressive is expected to continue delivering higher returns than the benchmark.

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