This Overlooked Stock Has Doubled the Market's Returns Over the Past Decade

All investors want one outcome: to make money! The stock market is a great way to build wealth, and one of the best ways to do that is by investing in high-quality companies that rake in cash regularly. But there are thousands of stocks to sift through, which can be daunting. So investors tend to stick with companies familiar to them and can overlook a lot of excellent businesses.

One company that flies under the radar is Arthur J. Gallagher (NYSE: AJG), which has delivered investors the goods, producing a 541% return in the past decade -- more than double the S&P 500's 224% return in the same period. Here's how it did it.

Helping companies manage uncertainty

Arthur J. Gallagher & Co. provides insurance brokerage and consulting services, helping businesses manage risk. It doesn't write insurance policies, though. Instead, it helps companies find policies to cover their risk. Gallagher is the fourth-largest insurance brokerage in the world based on total revenue and has offices worldwide, with 475 in the U.S. and another 300 internationally.

The company makes most of its money from its insurance brokerage segment, where it earns commissions from insurance companies to which it refers its clients. Over 70% of Gallagher's money comes from commissions, while another 22% comes from fees for consulting companies on managing risk.

Here's its secret to massive growth

Gallagher has done a tremendous job in the brokerage space and has posted impressive growth figures over the years. In the past decade, the broker grew its revenue at 13.5% annually, while its diluted earnings per share grew 12% annually.

AJG Revenue (TTM) Chart.

AJG Revenue (TTM) data by YCharts.

The broker achieved this growth through intelligent acquisitions that it seamlessly integrates into its own business. It calls these acquisitions "tuck-in opportunities," which are acquisitions that fit the company's business and help expand its revenue and customer base.

For example, in the past 12 months, Gallagher added $913 million in revenue through its acquisitions, nearly 11% of its total revenue during that period. Its most significant was the addition of Willis Tower Watson's reinsurance brokerage operations, which it bought for $3.25 billion but could increase to $4 billion if certain revenue targets are met. In the second quarter, Gallagher completed another 14 mergers that will add $85 million in annual revenue.

A chart shows Arthur J. Gallagher's acquisition revenue growth over 20 years.

Image source: Arthur J. Gallagher.

This tailwind will boost its earnings

The company has another tailwind working in its favor -- increasing insurance premiums. According to Marsh & McLennan's Marsh Global Insurance Market Index, insurance prices increased 9% from last year -- and for 19 quarters in a row.

An uptick in catastrophes in recent years and persistent inflationary pressures have resulted in insurers having to raise premiums for their customers. This favors Arthur J. Gallagher because it translates into higher commissions from those policies. Not only that, but CFO Doug Howell told investors on a recentearnings callthat inflation wouldn't have much of an impact on 80% of its expense base.

Gallagher should continue seeing stellar growth this year and next, especially if inflation stays high. While Arthur J. Gallagher isn't a household name, the company has delivered steady profits and excellent returns and looks well-positioned to continue delivering for its shareholders.

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Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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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