The Hartford Financial Services Group, Inc.’s (NYSE:HIG) shares are still assigned a Buy investment rating. HIG’s ROE has the potential to go higher as the company grows its revenue derived from the higher-ROE Property & Casualty or P&C segment. The stock’s capital return has been boosted by a new buyback program, which means that its forward shareholder yield could be as high as 6.4%.
My latest update highlights Hartford Financial’s ROE improvement potential and attractive shareholder yield. I previously wrote about HIG’s “personnel changes” in my April 4, 2024 article.
ROE Could Rise Further On Favorable Changes To Revenue Mix
Hartford Financial’s ROE has been rising steadily in recent times. Moving ahead, there is room for further improvement in the company’s ROE assuming a higher revenue contribution from its Property & Casualty or P&C segment.
On a full-year basis, HIG’s ROE increased from 12.7% in FY 2021 to 14.5% and 15.8% for FY 2022 and FY 2023, respectively. In terms of quarterly trends, ROE for Hartford Financial expanded by +3.8 percentage points YoY and +0.8 percentage points QoQ to 17.4% in Q2 2024. These metrics were obtained from HIG’s Q2 2024 results presentation slides.
An assessment of Hartford Financial’s revenue mix and segmental ROE suggests that the company’s ROE might get better over time.
HIG derived 68%, 27%, and 5% of its trailing twelve months’ revenue up to end-Q2 2024 from the P&C segment, Group Benefits segment, and others respectively. Notably, the P&C segment’s Q2 2024 ROE of 18.9% was +250 basis points higher than the Group Benefits segment’s 16.4% ROE for the same quarter. As such, Hartford Financial’s overall ROE is likely to increase in the future if the company’s revenue contribution from the higher ROE P&C segment grows over time.
At the KBW Insurance Conference on September 4 last week, Hartford Financial noted that the company is “expanding our underwriting appetite, product sets within P&C.” HIG also emphasized at this recent early-September investor event organized by KBW that “there’s more diversification benefits we could still achieve as we think about writing more property” and “writing more casualty.”
In my prior April 4 write-up, I noted that I was impressed with HIG’s move to “appoint someone as experienced as Matthew Massaro (25 years of working experience at HIG)” as “Head of Sales” in early-2024 to “spearhead the Middle & Large Commercial sub-segment’s growth in the Northeastern region.” The Middle & Large Commercial sub-segment is part of Hartford Financial’s P&C segment, so this recent appointment is another sign that HIG is serious about expanding the P&C segment’s revenue contribution.
As per its latest quarterly results release, written premiums for the P&C segment grew strongly by +12% YoY in Q2, while the Group Benefits segment’s fully insured ongoing premiums increased by a modest +2% YoY for the recent quarter. Looking forward, it is likely that the P&C segment will continue to expand at a faster pace as compared to the Group Benefits segment, taking into consideration HIG’s recent investor conference comments and personnel changes.
Hartford Financial deserves to trade at a more demanding P/B valuation multiple taking into account its ROE improvement potential.
A fair P/B ratio is equal to [ROE – Perpetuity Growth Rate] divided by [Cost of Equity – Perpetuity Growth Rate] as per the Gordon Growth Model. I arrive at a target P/B metric of 3.0 times for HIG based on my assumptions of a 18% ROE, a 8% Cost of Equity, and a +3% Perpetuity Growth Rate.
The sell side consensus FY 2024 and FY 2025 ROE estimates for HIG are 18.1% and 18.2%, respectively according to S&P Capital IQ. Also, Hartford Financial’s ROE has already improved to 17.4% in Q2 2024 as mentioned above. This means that a 18% ROE assumption is reasonable. Separately, the Cost of Equity metrics for insurance companies are in the 7%-8% range based on data compiled by New York University professor Aswath Damodaran.
HIG is currently trading at 2.2 times trailing P/B as per S&P Capital IQ data, so the stock has a potential capital appreciation upside of around +36% assuming that it re-rates to my target P/B multiple of 3.0 times.
Shareholder Yield Will Likely Be Enhanced By New Buyback Program
HIG offers an enticing shareholder yield, as the company’s capital return has boosted by a share new repurchase plan.
The company stressed at the early-September KBW Insurance Conference that “we’re generating excess capital” as seen with “a new share buyback program.” In its Q2 2024 results release, Hartford Financial disclosed that its board “authorized a new $3.3 billion share repurchase program, effective from Aug. 1, 2024, through the end of 2026.”
This new buyback plan is significant considering two key points. Firstly, the size of Hartford Financial’s prior two-year buyback program initiated in mid-2022 was -9% smaller (as compared to the new share repurchase plan) at $3.0 billion. Secondly, HIG guided at its second quarter results briefing that its quarterly share buybacks could increase from $350 million for Q2 to $400 million in Q3 and beyond.
In other words, Hartford Financial’s potential next twelve months’ buyback yield is roughly 4.8% based on the assumption of $400 million repurchases on a quarterly basis.
On the other hand, HIG’s potential next twelve months’ dividend yield is 1.6% assuming that the company continues with its quarterly dividend distributions per share of $0.47 which it has done for the past four quarters. At the company’s Q2 2024 earnings briefing, Hartford Financial indicated that “we feel very good about the capital generation that we’re seeing and we would expect to see our dividends reflect that.” This sends a strong signal that HIG is likely to maintain its current dividend payouts going forward.
The forward shareholder yield (sum of buyback yield and dividend yield) for HIG is estimated to be an attractive 6.4% as per my analysis presented above.
Variant View
Hartford Financial could be a less worthy investment candidate if certain risks materialize.
A dividend cut or a slower-than-expected pace of share repurchases will make the stock’s future shareholder yield less appealing.
The other risk is that HIG’s P&C segment expands much slower than expected going forward, and the company’s overall ROE doesn’t receive a significant boost from revenue mix changes as a result.
Conclusion
HIG’s P/B multiple could re-rate to 3.0 times assuming that its ROE improves to 18%. The stock also boasts an enticing shareholder yield of 6.4%. Hartford Financial’s valuation re-rating potential and favorable capital return prospects are key factors supporting my Buy rating.
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