The idea that auto insurance companies are a value investment is hardly a new one; GEICO has been part of Berkshire Hathaway (BRK.B) for years. Yet is it still a valid concept in today’s rapidly changing world?
The rapid advancements that self-driving car technology is going through and the declining number of younger drivers certainly raise questions about auto insurance’s future. Will the industry remain a cash cow in years to come, or will it lose float at some point?
A good way to answer these questions is to take a look at one of the biggest and highest profile vehicle insurers around—Allstate (NYSE: ALL). Is this company, which raised its rates last year, still generating enough float from its business model to be a value investment?
Buffett’s rationale for investing in insurers is that the premiums generate a vast amount of float. Uncle Warren uses the float from insurers such as GEICO to make up for the losses at other businesses, such as manufacturers and pipeline companies, which are more vulnerable to fluctuations in the market.
Does Allstate Still Have Float?
The most recent set of financial numbers indicates that Allstate still has a lot of float. On December 31, 2015, it reported the following numbers:
- $2.617 billion in cash and short-term investments
- $3.616 billion in cash from operations
- $2.711 billion in net income
- A profit margin of 5.63%
- $846 million free cash flow
- $35.65 billion in revenue
Okay, that sounds really good, but I can think of some other companies with a lot more float right off the top of my head. Alphabet (NASDAQ: GOOG), the company formerly known as Google, reported a free cash flow of $4.315 billion, a net income of $16.42 billion, $26.02 billion in cash from operations and a whopping $73.07 billion in cash and short-term investments on December 31, 2015.
Facebook Has Far More Float Than Allstate
Nothing to disparage Allstate here—it is still a good company—but the cash figures that Alphabet (NASDAQ: GOOGL) reported indicate it might be time to rethink some of our value investing theories. Tech companies, including Apple (NASDAQ: AAPL), Amazon (NASDAQ: AMZN) and Facebook (NASDAQ: FB), now seem to be outperforming insurers like Allstate when it comes to some of the classic value criteria.
Facebook, for example, reported $18.43 billion in cash and short-term investments on December 31, 2015. That figure indicates an incredible amount of float; it actually exceeded Facebook’s revenues of $17.93 billion. Facebook also reported a net income of $3.688 billion, a free cash flow of $2.135 billion, $1.582 billion in cash from financing and $8.599 billion in cash from operations on the same day.
Perhaps it is time for value investors to spend a lot more time in Silicon Valley and pay lot less attention to the world of insurance. Some of the tech companies are proving better classic values than traditional value stocks. Mark Zuckerberg and Larry Page have figured out how to build float-generating machines that rival Warren Buffett’s in the power to churn out cash.
Is Auto Insurance Still a Value Investment?
Despite being outperformed by some of the tech money machines, some auto insurers, including Allstate, still remain decent value investments. Allstate did deliver a dividend yield of 1.78% and a return on equity of 11.12% on March 18, 2016.
Yet it looked overpriced to me at $67.23 a share, even though the current valuation gave Allstate a market cap of $25.43 billion and an enterprise value of $29.69 billion. Therefore, Allstate can still be considered a value investment in spite of my skepticism.
Okay, now for the big question: Should you add Allstate to your portfolio? If you are looking for a dividend stock, I would say yes, although I would balance it out with a good tech stock such as Facebook, Alphabet or Apple. There is still a lot of value in auto insurance, and there will be for a long time to come, even though it lags far behind some tech stocks in the float department.