Warren Buffett Stocks: Aon Plc

Berkshire Hathaway (BRK-B) has an equity investment portfolio worth over $360 billion, as of the end of the 2022 first quarter.

Berkshire Hathaway’s portfolio is filled with quality stocks. You can follow Warren Buffett stocks to find picks for your portfolio. That’s because Buffett (and other institutional investors) are required to periodically show their holdings in a 13F Filing.

Note: 13F filing performance is different than fund performance. See how we calculate 13F filing performance here.

As of March 31st, 2022, Buffett’s Berkshire Hathaway owned about 4.4 million shares of Aon Plc (AON) for a market value of $1.4 billion. Aon represents about 0.4% of Berkshire Hathaway’s investment portfolio. This marks it as the 23rd largest position in the portfolio, out of 49 stocks.

This article will analyze the financial services company in greater detail.

Business Overview

Aon is a professional services firm headquartered in London, United Kingdom. The company provides a variety of services including consulting, risk management, and health plan management. Aon serves customers in over 120 countries and has 50,000 employees.

U.S. investors can initiate an ownership stake in Aon through American Depository Receipts that trade under the ticker AON on the New York Stock Exchange.

Aon reported first-quarter results on April 29th, 2022. Adjusted earnings-per-share increased 13% year-over-year to $4.83. Total revenue was up 4% year-over-year to $3.7 billion.

Organic revenue grew by 8%, however, as the company experienced high levels of customer retention and net new business bookings.

Commercial Risk Solutions generated revenue of $1.72 billion, which made up 47% of total revenue. Reinsurance Solutions, Health Solutions, and Wealth Solutions posted revenue of $976 million, $638 million, and $345 million which made up 27%, 17%, and 9% of total revenue.

Operating margin grew 190 basis points compared to a year ago, to 37.2%, on higher revenue and essentially flat operating expenses.

Aon repurchased 2.8 million shares in the first quarter, for roughly $800 million. The company also announced a massive $7.5 billion increase in their share repurchase authorization and increased the dividend by 10% to a new payout of $2.24 per share.

Our current earnings estimate for fiscal 2022 stands at $13.25.

Growth Prospects

Between 2012 and 2021, Aon compounded its adjusted earnings-per-share at a rate of nearly 17% per year.

We believe that Aon will continue to grow earnings quite strongly, although at a slower rate than its impressive historical growth rate.

Most of Aon’s businesses are growing successfully, though the Wealth Solutions business was essentially flat year-over-year in the first quarter.

We expect earnings growth to come, in part, from continued organic revenue growth. Leadership continues to expect mid-single-digit or higher organic revenue growth over the long term. Organic revenue growth in the first quarter was driven by strong retention and net new business generation.

Source: Investor Presentation

Expense savings and share repurchases will also add to the bottom line. Currency fluctuations, however, have been unfavorable to the company in the past, and may continue to be a headwind. In the first quarter, the company faced a $(0.19) negative impact to adjusted EPS from forex translation.

We are forecasting the company can generate 10% annualized earnings growth in the intermediate term.

Competitive Advantages & Recession Performance

Aon’s diversified revenue streams earned through its broad assortment of professional services could be considered a competitive advantage for the company, along with its world-class client list and reputation.

This diversified revenue stream added to its recession resilience during the Great Recession, and again during the COVID pandemic.

Aon sports a solid payout ratio, which we rate as extremely safe. The forecasted payout ratio for 2022 stands below 20% of earnings. The payout ratio in the last ten years has averaged 20.4%, so it is roughly in-line with the average ratio.

The downside, however, is that Aon has a very small dividend yield of below 1.0%. Still, this is in-line with its average yield, but is something to consider for income investors. Given the low payout ratio and positive earnings growth outlook, the dividend should continue to grow at a strong rate of around 10%.

Valuation & Expected Returns

Shares of Aon Plc have traded narrowly for a 5- and 10-year average price-to-earnings multiple of 19.5 and 19.2, respectively. Shares are now trading above both of these averages, which indicates that shares could be overvalued at the current 20.5 times earnings. However, given Aon’s strong expected growth rate and its upward trending average multiple, we find the company to be just slightly undervalued.

Our fair value estimate for Aon stock is 21.0 times earnings. If this proves correct, the stock will benefit from a small 0.5% annualized gain in its returns through 2027.

Shares of Aon currently yield just 0.8%, which is just slightly under its 5- and 10-year average yields of 1.0% and 1.1%. On a dividend yield basis, Aon shares seem to be trading at a small premium.

Putting it all together, the combination of valuation changes, EPS growth, and dividends produces total expected returns of 11.3% per year over the next five years. This makes Aon Plc a buy.

Final Thoughts

Aon is a stable growth stock in the financial services sector located in the United Kingdom.

The company stock has held up fairly well in the current market, with a year-to-date loss of 9%. As a result, shares are not very discounted. Still, we see a strong earnings growth outlook for Aon, which will fuel the bulk of its total returns, given it has a paltry yield of below 1.0%.

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