2023-11-02 07:00:00 ET
Summary
- The recession might seem far away, but the bond market is convinced the Fed will "hike until the economy breaks."
- DC and geopolitics are a hot mess, and consumers expect inflation to be 50% over the next decade, with prices nearly doubling from pre-pandemic levels.
- ALIZY has sold off in recent weeks and is now 22% undervalued, growing 11%, and yielding a very safe 5.4%.
- It offers a Buffett-like nearly 19% annual return potential for the next decade and 25% annually over the next 2 years.
- Rating agencies all agree, Allianz is among the world's safest and best run insurance companies, and high rates should help its growth rate. If you buy ALIZY stock today, your retirement will thank you in the long term.
This article was coproduced with Dividend Sensei.
Recession fears are still high among Americans despite the economy roaring at 5% in the most recent quarter.
The bond market is 96% confident of a recession in 2024, and even if one can be avoided next year, 43% of economists think one is all but inevitable in 2025.
How on earth can that be? Are the economists blind? Don't they know that Taylor Swift's concert tour added $4 billion to the economy?
Or that American consumers are unsinkable?
-
McDonald's raised its prices by 8% this quarter
-
Coca-Cola increased its prices 9%
-
Pepsi increased its prices by 14%
Thanks to the roaring stock market in 2023 and home prices at record highs (and now climbing again), economists at Bloomberg estimate that US consumers have $1.5 trillion in additional wealth they are likely to spend.
-
$800 billion of that already spent this year
That's on top of their rising wage income, which finally outpaced inflation for the first time in three years.
So how can a booming economy with the strongest job market in 54 years fall into recession?
The Fed: The Economy's Sword Of Damocles
The story of the Sword of Damocles is an ancient Greek moral tale about the perils of power.
Damocles, a courtier envious of King Dionysius' wealth and power, was offered a chance to switch places with the king. However, Damocles quickly grew uneasy and relinquished the throne when he noticed a sword hanging by a single hair above his head, symbolizing the constant danger and responsibility accompanying great power.
At some point, that sword will drop, and the same is true for the Fed and the recession.
A booming economy and consumers who are hell-bent on revenge spending after the pandemic are causing inflation to rise again.
-
Three consecutive months of rising CPI
The Fed's core PCE, the official inflation benchmark, is stuck at 3.7%, and the Cleveland Fed thinks it will remain there for the next two months.
Goldman Sachs thinks the CPI headline inflation might rise to as much as 5% by January.
Can the Fed risk consumer inflation expectations, which are 4% for the next decade, climbing to 5%?
What would that mean for long-term interest rates and the borrowing costs of the US government?
They would soar from 3% per the Congressional Budget Office's current base case to 8% to 8.5%, according to BlackRock's head of fixed income.
Yes, 10-year bonds could yield 8.5% if the Fed does nothing, causing:
-
30-year mortgage rates to soar to almost 12%
-
the Fed fund rate to have to rise from 6.5% to 7% (according to Jamie Dimon)
-
auto-loan rates soaring to 13%
-
credit card rates rising from 24% to 25%
Even if this worst-case scenario doesn't happen, the Fed already has raised rates far above levels that most people realize.
According to Bloomberg, the real adjusted Fed funds rate isn't 5.25%. Its 8%, factoring in tightening financial conditions and reverse money printing.
In the Pandemic, it hit -0.5%, and now it's up 8.5% in about two years.
No economy in human history has ever withstood an 8.5% increase in effective interest rates in two years and avoided a recession.
Could this be the first time? How smart is it to gamble your retirement dreams on the ultimate long-shot?
A long-shot the bond market puts at less than a 4% probability?
High-Yield Dividend Ultra SWANs: The Ultimate Safe Haven In Troubled Times
You might be tempted to sell all your stocks and sit in cash forever, with money now yielding a fat 5.5%.
But while a 2% actual yield on risk-free cash is excellent, remember that dividend growth stocks are the most potent wealth and income-compounding machine ever devised.
Over the last 50 years, cash has delivered 0.8% real returns, adjusted for inflation. That means $1 invested in T-bills 5 years ago is worth $1.46 today.
That same $1 invested in the S&P is worth $6.03, but invested in dividend growth stocks? $20.43.
Long-term dividend growth stocks are 14X better wealth compounded than cash.
And if you're looking for the safest of the safe high-yield options today? It's hard to go wrong with one of the world's safest insurance companies.
Allianz: Among the World's Safest Insurance Companies
-
Rating agencies (and Morningstar, Sebastian Wolf, and I) consider Allianz (ALIZY) the best-run and safest insurance company on earth.
ALIZY Credit Ratings
Rating Agency | Credit Rating | 30-Year Default/Bankruptcy Risk | Chance of Losing 100% Of Your Investment 1 In |
S&P | AA Stable Outlook | 0.51% | 196.1 |
Fitch | AA- Stable Outlook | 0.55% | 181.8 |
Moody's | A+ (A+ equivalent) Stable Outlook | 0.60% | 166.7 |
AMBest | Aa3 (AA- equivalent) Stable | 0.55% | 181.8 |
Consensus | AA- Stable Outlook | 0.55% | 181.0 |
(Source: S&P, Fitch, AMBest, Moody's)
Four rating agencies estimate ALIZY's 30-year bankruptcy risk at 0.55%, or a 1 in 181 chance that investors will get wiped out over the next three decades.
How low risk is ALIZY?
Goldman Sachs thinks the long-term risk of nuclear war with Russia is 2.5% or 1 in 40 chances.
The risk of ALIZY going to zero is about 5X lower than that.
What explains ALIZY's super low-risk profile?
The King Of Risk Management
Allianz is so conservatively run that it has been paying dividends since it was founded in 1890.
OK, that's great, but many old companies have been paying dividends for a long time. But how many have never missed a dividend payment since 1890? For 133 years?
Including through:
-
Two world wars
-
a flu pandemic that killed 5% of humanity
-
the Great Recession
-
a Pandemic that caused the US economy to fall at a 32% annualized rate, 50% faster than the Great Depression
What S&P Thinks Of Allianz's Risk Management: Top 1% Of All Companies On Earth
We use S&P Global's global long-term risk-management ratings for our risk rating.
-
S&P has spent over 20 years perfecting its risk model
-
which is based on over 30 major risk categories, over 130 subcategories, and 1,000 individual metrics
-
50% of metrics are industry-specific
-
this risk rating has been included in every credit rating for decades
The DK risk rating is based on the global percentile of a company's risk management compared to 8,000 S&P-rated companies covering 90% of the world's market cap.
ALIZY Scores 99th Percentile On Global Long-Term Risk Management
S&P's risk management scores factor in things like:
-
supply chain management
-
crisis management
-
cybersecurity
-
privacy protection
-
efficiency
-
R&D efficiency
-
innovation management
-
labor relations
-
talent retention
-
worker training/skills improvement
-
occupational health and safety
-
customer relationship management
-
business ethics
-
climate strategy adaptation
-
sustainable agricultural practices
-
corporate governance
-
brand management
Classification | S&P LT Risk-Management Global Percentile | Risk-Management Interpretation | Risk-Management Rating |
BTI, ILMN, SIEGY, SPGI, WM, CI, CSCO, WMB, SAP, CL | 100 | Exceptional (Top 80 companies in the world) | Very Low Risk |
Allianz | 99 | Exceptional (Top 80 companies in the world) | Very Low Risk |
Strong ESG Stocks | 86 | Very Good | Very Low Risk |
Foreign Dividend Stocks | 77 | Good, Bordering On Very Good | Low Risk |
Ultra SWANs | 74 | Good | Low Risk |
Dividend Aristocrats | 67 | Above-Average (Bordering On Good) | Low Risk |
Low Volatility Stocks | 65 | Above-Average | Low Risk |
Master List average | 61 | Above-Average | Low Risk |
Dividend Kings | 60 | Above-Average | Low Risk |
Hyper-Growth stocks | 59 | Average, Bordering On Above-Average | Medium Risk |
Dividend Champions | 55 | Average | Medium Risk |
Monthly Dividend Stocks | 41 | Average | Medium Risk |
(Source: DK Research Terminal)
Still not convinced?
How about we ask the bond market, the most conservative, risk-averse income investors in the world, and the "smart money" on Wall Street?
The bond market estimates a slightly higher risk that ALIZY fails in the next 30 years... all of 2.8%.
-
roughly equal to the chance of nuclear war with Russia
But that risk has been falling modestly in the last week and over the past six months.
In fact, in the last six months, ALIZY's price has ranged from $21 to $25, a range of almost 20%.
It's fundamental risk of failing in the next five years? Between 0.35% and 0.55%.
The bond market is smart enough to ignore the noise and focus on the fundamentals.
And if you do the same, you can ensure a 97% chance of financial success.
Why is ALIZY down about 15% in the last few weeks? Partially because of its float portfolio, which has always been and always will be invested into largely risk-free bonds.
Remember that bond yields have soared from 0.5% during the pandemic to 5% recently, a 900% increase.
ALIZY never could stop doing what insurance companies do during the era of negatively priced money.
Chasing yield is the best way for any insurance company to blow themselves up, so ALIZY kept buying bonds even as interest rates hit their lowest levels in history.
When rates went up, those unrealized losses meant that their equity looked like it's collapsed, to almost $30 billion.
But those aren't actual losses, not unless ALIZY is forced to start selling bonds at the worst possible time.
So, how likely is that?
ALIZY has more than double the regulatory requirement for its solvency ratio.
The solvency ratio measures assets/liabilities, in this case, the value of the claims people might file against it.
European regulators set 100% as the minimum, and ALIZY's policy is to be at least above 180% and targets 200% or above.
At the end of last year, a devastating year for bonds, it was 201%.
This year? Another terrible year for bonds? It's up to 208%.
How might a 30% stock market crash affect that balance sheet? The solvency ratio would fall from 208% to 196%, according to management.
What about interest rates soaring another 1%, 2%, or 3% in the Fed's model worst-case scenario?
In the very low-risk event of the Fed having to raise to 8% and interest rates across the curve soaring and bashing the value of its bond portfolio, ALIZY's solvency ratio would rise to 214!
The company has put on interest rate hedges so that its solvency ratio rises by 1% for every 0.5% rate increase.
OK, but what if we get a recession and rates plunge? Then, might ALIZY's hedges not blow up its balance sheet?
The world is plunged into chaos, and the Fed cuts overnight to zero.
Bond yields plunge worldwide, and ALIZY's hedges tank in value.
In the worst possible scenario for those hedges, ALIZY's solvency ratio falls 18% to 190%.
There's no insurance company on earth, not even Berkshire, that manages its risk this well.
Allianz: A Growth Titan In A Higher Rate World
OK, so I've proven that buying ALIZY stock is purchasing the stock of the safest insurance company on earth. But don't show me how not to lose money. Show me how to make money.
Management is targeting 5% annual dividend growth, at least in line with its minimum EPS growth target.
Analysts expect 11% long-term EPS growth, incredible growth that's almost 50% faster than the S&P's growth rate, from the world's largest insurance company.
Why is Allianz expected to grow so much faster? Higher for longer interest rates.
Remember that ALIZY is earning 7.5% profits on its policies, about 4X to 8X more than its peers.
And then, it invests those premiums into a portfolio while it waits to get claims and pay them out.
Insurance float has a cost equal to the inverse of the combined ratio; in this case -7.5% is the cost of capital.
Now add to that negative cost money the new fatter yield from bonds. And you can see why ALIZY is expected to be raking in profits like never before.
In the meantime, ALIZY continues to execute like a master through policy disciplines and industry-leading profitability.
ALIZY generated a 92.5% combined ratio, meaning 7.5% profits on insurance policies last year.
In the future, the consensus is that its combined ratio (what % of the premium is paid out as claims) will be 92.5%.
How about its peers?
-
One-year average of 99.2%
-
Two year average: 99.4%
-
5-year average 98.2%
-
10-year average 98.3%
The average insurance company is lucky to make a 1% profit on policies. It relies on investing profits and income to make money.
ALIZY earns a 7.5% profit, 4X to 8X more than its industry peers over the last decade.
What does that mean for ALIZY investors buying today?
Valuation: A Wonderful Company At A Wonderful Price
Let's take a look at ALIZY's fundamentals.
Fundamentals Summary
-
yield: 5.4%
-
dividend safety: 95% very safe (1.25% dividend cut risk)
-
overall quality: 92% very low-risk 12/13 Super SWAN insurance company
-
credit rating: AA stable (0.52% 30-year bankruptcy risk)
-
long-term growth consensus: 11.0%
-
long-term total return potential: 16.4% vs 10.2% S&P 500
-
price: $29.66
-
historical fair value: $23.00
-
discount to fair value: 23% discount (strong buy) vs 1% overvaluation on S&P
-
10-year valuation boost: 2.7% annually
-
10-year consensus total return potential : 5.4% yield + 11.0% growth + 2.7% valuation boost = 19.1%
-
10-year consensus total return potential: =474% vs 164% S&P 500 .
FAST Graphs, FactSet
FAST Graphs, FactSet
ALIZY offers 3X the S&P's yield, 3X the return potential through 2025, and 3X the return potential for the next decade.
Rating | Margin Of Safety For Very Low-Risk 13/13 SWAN Quality | 2023 Fair Value Price | 2024 Fair Value Price | 12-Month Forward Fair Value |
Potentially Reasonable Buy | 0% | $28.83 | $29.81 | $29.66 |
Potentially Good Buy | 10% | $25.95 | $26.83 | $26.69 |
Potentially Strong Buy | 20% | $23.06 | $23.85 | $23.73 |
Potentially Very Strong Buy | 30% | $18.16 | $20.87 | $20.76 |
Potentially Ultra-Value Buy | 40% | $17.30 | $17.89 | $17.80 |
Currently | $23.00 | 20.22% | 22.84% | 22.45% |
Upside To Fair Value (Including Dividends) | 30.78% | 35.04% | 34.39% |
It's a strong buy for anyone comfortable with the risk profile.
Risk Profile: Why Allianz Isn't Right For Everyone
There are no risk-free companies, and no company is right for everyone. You have to be comfortable with the fundamental risk profile. Regulatory risks are always present for an insurance company.
“We Assign Allianz a Morningstar Uncertainty Rating of Medium. The outcome of the rulings on the Structured Alpha Funds are mainly settled. While several known unknowns relate to asset management and insurance, there is reasonable visibility on earnings and cash flows. The ban refers only to AllianzGI U.S. mutual funds and has not touched AllianzGI's separate accounts. The SAFs were managed for institutional investors in different versions and high-net-worth individuals; the ruling means AllianzGI U.S. can continue to manage these mandates and funds. The SEC and DOJ have hit AllianzGI where they can and are unlikely to hit investors in separate accounts because much of that relates to long-term retirement funds ." - Morningstar
ALIZY also will be impacted by rising claims costs caused by inflation, and price increases will help to offset these costs, but with a lag. Meanwhile, rising interest rates should benefit the margins because of its strong backbook of traditional long-term savings.
ALIZY's risk profile includes:
-
disaster risk (like war, hurricanes, etc) - made worse by climate change
-
inflation risk (value of properties insured increases during inflation)
-
economic cyclicality risk (earnings are leveraged to financial markets via the portfolio and can fall significantly in a recession
-
currency risk (for the dividend especially)
-
annual dividend (some people don't like that)
-
regulatory risk (EU company so regulatory capital buffers can change, and so can tax rates)
ALIZY has a 26.375% tax rate on dividends, though there is a tax credit for US investors owning it in a taxable account.
-
Do not own in a retirement account
-
No tax credit in retirement accounts, and you will still get the dividend tax withholding
Remember, we've already seen how ALIZY's ability to manage its risks is sensational, the top 1% of all companies on earth.
Classification | S&P LT Risk-Management Global Percentile | Risk-Management Interpretation | Risk-Management Rating |
BTI, ILMN, SIEGY, SPGI, WM, CI, CSCO, WMB, SAP, CL | 100 | Exceptional (Top 80 companies in the world) | Very Low Risk |
Allianz | 99 | Exceptional (Top 80 companies in the world) | Very Low Risk |
Strong ESG Stocks | 86 | Very Good | Very Low Risk |
Foreign Dividend Stocks | 77 | Good, Bordering On Very Good | Low Risk |
Ultra SWANs | 74 | Good | Low Risk |
Dividend Aristocrats | 67 | Above-Average (Bordering On Good) | Low Risk |
Low Volatility Stocks | 65 | Above-Average | Low Risk |
Master List average | 61 | Above-Average | Low Risk |
Dividend Kings | 60 | Above-Average | Low Risk |
Hyper-Growth stocks | 59 | Average, Bordering On Above-Average | Medium Risk |
Dividend Champions | 55 | Average | Medium Risk |
Monthly Dividend Stocks | 41 | Average | Medium Risk |
(Source: DK Research Terminal)
How We Monitor ALIZY's Risk Profile
-
20 analysts
-
4 credit rating agencies
-
24 experts who collectively know this business better than anyone other than management
-
the bond market for fundamental risk changes in real-time
“When the facts change, I change my mind. What do you do, sir?"
- John Maynard Keynes
There are no sacred cows. Wherever the fundamentals lead, we always follow. That's the essence of disciplined financial science, the math behind retiring rich and staying rich in retirement.
Allianz: A 5.4% Yield You Can Trust In The Coming Recession
I understand how you might be feeling uncertain right now.
On one hand, the US economy seems unsinkable.
The job market is the best it's been in 54 years.
Yet consumers feel like dirt due to expectations for inflation of 50% over the next decade.
-
84% inflation since the Pandemic began
Investors feel terrified with the CNN Fear and Greed index recently hitting 17 (extreme fear), although the broader market is only down 8%.
The Fed, on the one hand, seems happy not to hike rates but bent on keeping them higher for longer until the economy finally breaks.
And, of course, DC and the world of geopolitics is a hot mess, with wars, rumors of wars, and gridlock at historic levels.
In such a world of uncertainty, it's easy to lose track of what matters.
Short-term stock price is vanity, cash flow is sanity, but dividends are reality.
ALIZY hiked its dividend by 10% in 2023 and is expected to hike it by 10% in 2024 and 7% in 2025.
This is among the world's safest insurance companies, a legendary risk manager, growing faster than the S&P 500, yielding 3X as much, and so undervalued you can potentially achieve 3X better returns than the S&P over the next 2 to 10 years.
Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.
For further details see:
Allianz: One Of The World's Safest Insurance Companies Yields 5.4%