Go with Flo: 7 Reasons to Buy Progressive

07/19/2018 5:00 am EST

Focus: FINANCIALS

Richard Moroney

Editor, Dow Theory Forecasts

Flo, the perky spokeswoman for Progressive (PGR) likes to tell potential customers that Progressive will compare its rates to those of its competitors. That way, the insured can assess the value of the insurance before buying, observes Richard Moroney, editor of Dow Theory Forecasts.

We’re going to take a similarly progressive approach to assessing the appeal of Progressive shares, providing seven industry or historical comparisons to put the investment in context.

1) New customers. Credit Progressive’s superior growth rate (more on that below) to an influx of new customers. Last year, about 44% of Progressive’s clients had been with the company less than a year, up from 32% in 2014.

2) Operating growth. In the 12 months ended March, Progressive grew sales more than 15% (triple the industry average) and per-share profits 59% (versus an industry average decline of 8%).

3) Efficiency. Over the last 10 years, Progressive’s non-acquisition expense ratio for its personal lines (insurance for individuals) has trended strongly lower, falling below 10% in 2017 from more than 12% in 2007.

4) Valuation. Despite returning 36% over the last year, more than twice the industry average, Progressive trades at 14 times expected 2018 earnings — 14% below the average for property & casualty insurers in the S&P 1500. Progressive trades at an even bigger discount based on price/ operating cash fl ow (24%) and price/ free cash flow (46%).

5) Paper trails. At the end of 2017, nearly 70% of Progressive’s auto policies were paperless, versus 50% in mid-2012. Not surprisingly, postage costs per policy have declined 19% over the last five years and more than 40% over the last 10.

6) Automotive performance. In 2017, Progressive’s net written car insurance premiums rose 16%, more than twice the growth rate of the broad industry, according to the National Association of Insurance Commissioners. Progressive’s combined ratio — the percentage of premiums paid out for claims and expenses — was 93% compared to an industry average of more than 100%.

7) Work force. According to a survey by Gallup Analytics, only 33% of U.S. workers are actively engaged with their employer, meaning they are involved in, enthusiastic about, and committed to their work. At Progressive, the percentage is 62%.

Progressive is best known for its personal vehicle coverage (85% of 2017 net premiums written), but also insures commercial vehicles (11%) and residential property (4%). Personal lines accounted for more than 90% of underwriting profits last year.

The company does not pay a quarterly dividend. Its annual payout, announced in December and paid in January or early February, is tied to annual underwriting and operating performance.

While the payout may vary from year to year, it trends generally higher (up an annualized 27% over the last nine years). Overall, we rate the stock a Long-Term Buy, which suggests we think Progressive stacks up pretty well.

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