Insurance is one of Warren Buffett's favorite businesses, and it's a favorite of some of our Motley Fool contributors as well. We recently asked three of them for their favorite insurance stock right now, and here's why they think investors should take a closer look at Aflac (AFL -0.14%), UnitedHealth Group (UNH 0.30%), and Chubb (NYSE: CB).
A quackin' good value
Matthew Cochrane (Aflac): Aflac will never be a sexy stock pick. But it's more than capable of delivering steady earnings gains, and it has a shareholder-friendly management that returns capital to investors through share repurchasing and dividends. Aflac provides supplemental health insurance to more than 50 million policyholders in Japan and the United States for things such as workplace injuries and cancer.
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In the insurer's 2019 first quarter, revenue rose to $5.66 billion, a 3.5% increase year over year, while earnings per share -- adjusted for the impact of foreign currency -- rose to $1.13, a 7.6% increase over last year's first quarter. There were $490 million in share repurchases in the first quarter, and management projects 2019 full-year buybacks to fall between $1.3 billion and $1.7 billion.
Aflac currently pays a quarterly dividend of $0.27, giving the stock price a dividend yield of 2.18%. The payout ratio, a metric showing how well the dividend payout is supported by earnings, is just 24% (the lower the better), meaning that there is plenty of room for management to raise the dividend. Given the company's current track record of raising the dividend for 36 consecutive years -- placing it in the elite Dividend Aristocrat class -- this seems like a good bet.
This health insurer just raised guidance and reported impressive growth
Matt Frankel, CFP (UnitedHealth Group): One insurance stock that's on my radar right now is UnitedHealth, the largest health insurer in the U.S.
For starters, recent results have been quite strong. In addition to beating expectations for both revenue and earnings, UnitedHealth added 880,000 members to its health plans over the past year and posted a medical care ratio (premiums versus the cost of delivering benefits) that came in better than analysts had expected. Plus, insurance premiums jumped by nearly 8% year over year.
The company's Optum pharmacy benefit manager (PBM) is doing exceptionally well, with a 12% year-over-year revenue jump for that unit.
To be fair, there are some political headwinds that are important to mention. Congress has been keeping a close eye on health insurers and PBMs, and several Democratic presidential candidates could spell trouble for health insurers if elected.
As a result of its strong performance, UnitedHealth raised its full-year earnings forecast, and shares trade for less than 15 times 2019 earnings based on the midpoint of the guidance range. Despite the political overhang on the healthcare industry in general, this is still a remarkably cheap valuation for a company that just grew earnings and revenue by 23% and 9%, respectively, compared with the same quarter last year. While it isn't without risk, UnitedHealth certainly appears to make sense from a risk/reward standpoint.
Insurance that pays dividends
Dan Caplinger (Chubb): Jordan Walthen, a fellow Fool contributor, has taught me a lot about Chubb over the past year, highlighting the insurance giant's operational prowess as a hands-on player that takes a direct approach to avoiding unnecessary losses. With hundreds of the top businesses in the world on its client list, Chubb has developed a reputation for excellence that spans the globe. It doesn't hesitate to offer policies in a wide range of business lines, using its extensive capital reserves to protect itself against risks that other insurance companies wouldn't dare to take on.
For investors, Chubb has another source of appeal: an impressive history of paying dividends. For 25 straight years, Chubb has boosted its dividend on an annual basis, including a 3% increase early last summer. Already, the company has said that it will recommend a 26th straight boost at its annual shareholder meeting, scheduled for May 16, and investors can expect a similar-sized increase that will take the payout up to $0.75 per share on a quarterly basis.
Insurance is a cyclical business, and there's no guarantee that adverse events in the short run won't cause Chubb and the rest of the industry to see share prices fall. However, the company has proven time and time again that it can withstand the most difficult conditions in insurance, and there's every reason to believe it will be able to prove its dominance once again no matter what the future holds.
