Allstate to Execute $1B Stock Buyback - Analyst Blog

After seeking approval from its board, on Tuesday, home and auto insurer, The Allstate Corp. (ALL) announced its intention to repurchase its common stock worth $1 billion by the end of March 2012. The stock buyback program may be conducted at intervals depending upon market conditions primarily through open market purchase.

Despite the economic turmoil in the last couple of years, the company has been working vigorously to tame its liquidity and capital position in an efficient manner. Since 1995, Allstate has returned more than $28 billion to shareholders through dividends and share repurchases.

Further, with managed investment portfolio of over $100 billion, as on September 30, 2010, Allstate recorded an estimated $15.1 billion of statutory capital surplus at the insurance companies and $3.5 billion of investments at the holding company, reflecting a well-capitalized position for future growth.

Estimate Trend Revision

Over the last 30 days, since the third quarter earnings' release, 12 of the 18 analysts covering the stock have lowered their estimates for the fourth quarter of 2010, while one upward revision was witnessed. Currently, the Zacks Consensus Estimate for fourth quarter operating earnings is $1.02 per share, which would be down by 6.2% from the year-ago quarter.

The higher number of downward estimate revisions for the fourth quarter indicates a likelihood of downward pressure on the performance of the stock in the near term.

With respect to earnings surprises, the stock has been mixed over the last four quarters, with only two positive surprises. The average remained negative at 0.87%. This implies that Allstate has missed the Zacks Consensus Estimate by 0.87% over that period.

The downside potential for the estimate in the fourth quarter, essentially a proxy for future earnings surprises, currently stands at 0.98%.

Earnings Recap

Allstate's third quarter operating earnings of 83 cents per share came in way behind the Zacks Consensus Estimate of 97 cents and 99 cents recorded in the year-ago quarter.

Results for the quarter deteriorated primarily due to lower-than-expected premiums coupled with higher expenses incurred in the Property-Liability insurance segment, along with relatively higher tax expenses. However, lower catastrophic losses, prudent capital management and strong liquidity were quite impressive during the reported quarter. This is reflected by the growth in book value per share and the subsequent share repurchase program.

Dividend Update

Concurrently, the board of Allstate also declared a quarterly common dividend of 20 cents per share, payable on January 3, 2011 to stockholders of record as on November 30, 2010.

Our Take

We anticipate continued benefits from Allstate's diversification, superior financial strength rating, pricing discipline and proactive approach to investment, but the ongoing volatile markets along with interest rate and catastrophe risks will continue to impact the premiums and investment portfolio in the upcoming quarters.

On the other hand, buying back shares will help Allstate with fewer share count, thereby increasing earnings per share and return on equity and excess cash of the company. However, while this method helps in raising investors' confidence, it only tends to virtually elevate the market value of the stock.

Meanwhile, on Tuesday, life insurer Prudential Financial Inc. (PRU) also announced a dividend increment of as much as 64% along with a stock buyback plan.

On Tuesday, the shares of Allstate closed at $30.28, down 2.4%, on the New York Stock Exchange.