All Ahead with Allstate (ALL)

Legendary investor Warren Buffett has regularly talked up the attractiveness of the short-term insurance sector with its strong cash flows and its ability to generate investment income using other peoples’ money.

Founded in 1931, Allstate (ALL) became publicly traded in 1993 and at the time was the largest initial public offering in the world, and is now the largest publicly held personal lines insurer in the US. This is a well established company.

With those factors in mind, investors may want to consider Allstate Corporation (ALL) as a potential stock for their dividend portfolio. The company trades on a dividend yield of 2.4% but it should be remembered that many of the underlying businesses cut back their dividends in the last financial year as they sought to conserve cash. If the capital cannot be deployed it will more than likely be returned to shareholders in the form of dividends.

The company’s strategy is to create shareholder value in an uncertain economic climate, a somewhat clichéd statement of intent. However, the company delivered net income of $367 million while book value per share rose 7% during the quarter to $35.48. The company is currently trading at a discount to its book value with shares changing hands at around $30.

Operating income was $452m, or $0.83 per share, for the quarter compared to $538m in the same period of 2009, a result which the company says reflects a decline in its Property-Liability lines.

The operating performance of an insurer is often dictated by major events, either naturally occurring or man-made. Catastrophe losses totaled $386m during the third quarter of 2010, with 29 events reflecting losses of $371m. This compares to catastrophe losses of $407 million for the third quarter of 2009.

When looking at an insurer, the performance of the investment portfolio is critical.

Allstate’s (ALL) consolidated investment portfolio was $102.2 billion at September 30, 2010, up $2.3 billion from June 30, 2010.

Investment returns reflect lower interest rates, improved equity markets, and significant cash flow generated by the portfolio.

A glance through the 2009 annual report makes for interesting reading for dividend investors, most notably the management incentive awards. One of the metrics on which the management of the company is rated is consolidated net interest and dividends. Management has clearly defined goals around returning capital to shareholders and they are incentivized to meet these.

If investors remember that in 2008, AllState (ALL) was offering an average dividend yield of 3.1% and take note of the fact that the share was trading above $45 around this time then they may consider the stock as a potential long-term dividend play. If financial markets play the game, the stock may be a winner through the cycle.