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Brown & Brown On Track for Growth; Expense Concerns Stay - Analyst Blog

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On Jun 15, 2015, we issued an updated research report on Brown & Brown Inc.BRO .

Brown & Brown's first-quarter adjusted earnings per share were in line with the Zacks Consensus Estimate but improved year over year on top-line growth. Higher commissions and fees, and increased investment income drove the top line. With respect to the earnings surprise trend, this Zacks Rank #3 (Hold) insurance broker delivered surprises in two of last four quarters, with an average beat of 10.23%.

Brown & Brown boasts impressive growth driven by both organic means across all its segments, and strategic acquisitions and mergers that help it to spread its operations. These initiatives in turn have been propelling its revenues.

Moreover, as part of its business strategy to exit the reinsurance brokerage space, Brown & Brown divested Axiom Re in Dec 2014 and Acumen RE business in Jan 2015.

Strong operational performance has been helping Brown & Brown to generate solid cash flows.

Brown & Brown has never deterred from returning value to shareholders via dividend increase and share buybacks. During the first quarter of 2015, the company initiated a $100 million accelerated share repurchase program which it expects to complete in the second quarter. Still, the company would have $50 million remaining under its $200 million authorization approved in the second quarter of 2014.

With respect to dividend, the company has increased its payout each year at a 4-year CAGR of about 6%. Moreover, its current dividend yield of 1.3% is better than the industry average of 1.22%.

Nonetheless, Brown & Brown has been experiencing an increase in expenses due to higher compensation and operating expenses. These in turn is weighing on margin expansion. The company should strive to maintain a high magnitude of increase in total revenue than expense or its operating margin might suffer.

Moreover, the debt level at Brown & Brown has increased nearly five times in the last four years, resulting in deteriorating leverage ratios that also compare unfavorably with the industry average. A higher debt level is leading to an increase in interest expense over the years, which in turn is restricting margin expansion to some extent. The company must service its debt uninterruptedly; else its creditworthiness might be dented.

The Zacks Consensus Estimate currently stands at $1.72 for 2015 and $1.87 for 2016, translating into a year-over-year increase of 18.3% and 10.5%, respectively. The expected long-term earnings growth is pegged at 9.2%.

Stocks to Consider

Some better-ranked insurers are Endurance Specialty Holdings Ltd. ENH , Markel Corp. MKL and State Auto Financial Corp. STFC . All these stocks sport a Zacks Rank #1 (Strong Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days.Click to get this free report >>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

MARKEL CORP (MKL): Free Stock Analysis Report

ENDURANCE SPLTY (ENH): Free Stock Analysis Report

STATE AUTO FINL (STFC): Free Stock Analysis Report

BROWN & BROWN (BRO): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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