We retain our Neutral recommendation on Willis Group Holdings plc (WSH) following a mixed third-quarter earnings performance. The insurance broker carries a Zacks Rank #3 (Hold).
Why the Retention?
Willis Group’s third-quarter 2013 adjusted net income of 19 cents per share missed the Zacks Consensus Estimate by a penny. The results also lagged 13.6% from the prior-year quarter number.
However, the top line fared well on both counts for Willis Group riding on the strength of higher commissions and fees. Moreover, each segment delivered organic growth for the fourth consecutive quarter. With solid retention levels and new business growth, we expect the company to continue the momentum.
To enhance profitability, Willis Group has implemented several cost-saving initiatives. Management eliminated 207 positions and undertook rationalization of property and systems. As a result, this insurance broker expects to realize cost savings of approximately $20 million in 2013. The company is also expected to realize an annual cost savings of $25–$30 million.
Willis Group continues to strengthen its balance sheet. While cash position continues to improve, debt balance trended down, with improvement in debt cap ratio. Although Willis Group issued senior notes during the third quarter of 2013, the notes carried lower coupon rate. The proceeds were used to redeem the previous debts with higher coupon rates. Thus, capitalizing on the favorable interest rate environment, Willis Group has reduced its cost of debt.
Going forward, a strong balance sheet and steady cash flow is expected to help the company engage in capital deployment for buybacks, dividend payouts, debt repayments, acquisitions and investments that drive and support growth. Willis Group’s inorganic growth story, well supported by a strong balance sheet, looks impressive.
The insurance broker also remains focused on sharing its profit with shareholders. Its annualized dividend of $1.12 currently yields 2.53%. The figure puts Willis Group ahead of other insurance brokers like Aon plc (AON), with a dividend yield of 0.85%; Marsh & McLennan Companies Inc. (MMC) with 2.11%; and Brown & Brown Inc. (BRO) with 1.33%.
On the tepid side, lower net yields on cash and cash equivalents continue to weigh on investment income. We expect investment income to remain under pressure in the near term as interest rates have continued to experience a downtrend.
Moreover, Willis Group’s operating expenses have been on the rise, taking a toll on operating margin expansion. If expenses continue to accelerate, operating margin will be hugely affected, going forward.
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