We retain our Neutral recommendation on
Willis Group Holdings plc
) following the second quarter earnings performance, which
included a 3.5% positive earnings surprise. The insurance broker
carries a Zacks Rank #3 (Hold).
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Why the Reiteration?
Willis Group's second-quarter 2013 adjusted net income of 59
cents per share surpassed the Zacks Consensus Estimate by 3.5%,
but remained flat with the year-ago level.
Counting on the positives, organic growth in commissions and
fees, which forms the major component of Willis Group's revenue,
continues to post positive numbers. With solid retention levels
and new business growth, we expect the momentum to continue. Its
inorganic growth story also looks impressive.
Willis Group, to enhance its profitability, is undertaking a cost
savings initiative. 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.
These efforts are helping Willis Group to strengthen its balance
sheet. 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.
The insurance broker also remains focused on enhancing value for
its shareholders. Its annualized dividend of $1.12 currently
yields 2.63%. It is ahead of the industry yield of 2.39%. as well
as of some other insurance brokers like
), with a dividend yield of 1.02%,
Marsh & McLennan Companies Inc
) with an yield of 2.37%, and
Brown & Brown Inc
) with an yield of 1.11%.
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 declines.
Moreover, Willis Group's operating expenses have been on a rising
trend, taking a toll on operating margin expansion. If expenses
continue to accelerate, operating margin will be hugely affected,