The S&P fell by almost 5% during September. It was the worst month for the broader market since March 2020. And we all know what happened in March 2020. While that’s a bummer for those who like to see high stock prices, it’s a gift for those still in accumulation mode.

A lot of stocks have suddenly become much cheaper. Allstate Corp. (ALL) is an insurance company that operates as one of the largest property-casualty insurers in the United States. Founded in 1931, Allstate is now a $38 billion (by market cap) insurance giant that employs over 42,000 people. Allstate primarily sells auto and homeowners insurance. Property-casualty net underwriting premiums accounted for the vast majority of the company’s FY 2020 revenue. Of these premiums, they can be broken down into the following lines: auto insurance, 70%; homeowners, 23%; other personal lines, 5%; and commercial, 2%.

After the sale of its Allstate Life Insurance Company in early 2021, their main focus moving forward will be in property-casualty insurance. I like this focus. And I like the insurance business generally. In fact, it’s one of my favorite business models. That’s because of the ingenious way in which insurers make money from other people’s money. The P/E ratio is 10.2. That’s extremely low in a market where the S&P 500 has a P/E ratio of over 30. It’s also well off of the stock’s own five-year average P/E ratio of 11.6. And the yield, as noted earlier, is significantly higher than its own recent historical average. So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like? I valued shares using a dividend discount model analysis. I factored in a 10% discount rate and a long-term dividend growth rate of 8%. That DGR is on the high end of what I ordinarily allow for. But I think the fundamentals support it. The payout ratio is very low.

The demonstrated long-term dividend growth is nearly in the double digits. And the most recent dividend increase, which was announced earlier this year, was 50%. Moreover, the business has been producing very strong bottom-line growth. With the forecast for near-term EPS growth being only slightly below this number, I view the low payout ratio as something that affords the company some discretion and flexibility in terms of growing the dividend at a modestly higher rate. The DDM analysis gives me a fair value of $174.96. CFRA rates ALL as a 5-star “STRONG BUY”, with a 12-month target price of $160.00. I came out slightly high, but I’d also argue that Morningstar’s number is too low. Averaging the three numbers out gives us a final valuation of $149.65, which would indicate the stock is possibly 17% undervalued.

Bottom line: Allstate Corp. (ALL) is a high-quality insurance company that benefits from a powerful one-two punch. Recent results have been outstanding, and the business is positioned well. With a market-beating yield, more than a decade straight of dividend increases, double-digit dividend growth, a very low payout ratio, and the potential that shares are 17% undervalued, this looks like a clear long-term opportunity for dividend growth investors.

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