Aon Posts Another Earnings Beat - Analyst Blog

With its first-quarter 2014 operating earnings of $1.28 per share exceeding the Zacks Consensus Estimate of $1.17 per share, Aon plc AON delivered four straight quarters of positive earnings surprises. The result also outpaced the year-ago quarter's earnings by 15%.

The upside was buoyed by strong operating performance by the Risk Solutions business and efficient capital management.

Net income of $1.06 per share compared favorably with 82 cents per share in the year-ago period.

Total revenue of Aon went up 1% year over year to $2.9 billion on higher organic revenues (up 2% year over year), partly offset by an unfavorable impact from foreign currency translation. However, results lagged the Zacks Consensus Estimate of $3 billion.

Total operating expenses at Aon were $2.5 billion, down 1% year over year. Results were aided by higher savings associated with the restructuring programs, lower restructuring costs, a decline in acquisition related expenses, lower intangible asset amortization and a favorable impact from foreign currency translation.

Segment Update

Risk Solutions: Total revenue came in at $2.0 billion, up 1% year over year. Organic growth of 3% in commissions and fees was partially offset by a 1% decline in acquisition-related commissions and fees and a 1% unfavorable impact from foreign currency translation.

Adjusted operating earnings increased 6% year over year while operating margin surged 110 basis points to 23.6% during the quarter. The improvement was induced by strong organic revenue growth, cost containment measures and savings from the restructuring programs.  

Organic revenues at the Retail Brokerage segment increased 3% year over year. This was driven by higher organic revenues from the Americas business (up 4%), triggered mainly by new business generation in US Retail and prudent management of the renewal book portfolio across Latin America and Canada. Growth in International organic revenues (up 3%) also contributed to the improvement.

Organic revenues at the Reinsurance segment rose 3% mainly on higher facultative placements and capital market transactions, and an improved advisory business. Moreover, an increase in new business in treaty placements also aided the improvement.

HR Solutions: Total revenue of $965 million reflected a 1% year-over-year rise on a 1% organic growth in commissions and fees. Adjusted operating earnings decreased 6% year over year while operating margin declined 100 basis points to 13.3%.

Organic revenues at Consulting Services improved 1% year over year owing to higher investment and compensation consulting, mitigated by an expected unfavorable impact from timing in compensation consulting.

Organic revenues at Outsourcing increased 1%, driven by enhanced benefits administration and HR BPO.

Share Repurchase Update

During the quarter under review, Aon repurchased 7.2 million Class A Ordinary shares for nearly $600 million.

Dividend Update

On April 11, 2014, Aon increased its annual dividend by a significant 43%. In keeping with this annual hike, management declared a quarterly cash dividend of 25 cents per share, higher than 18 cents paid on Feb 17, 2014 to shareholders of record as of Feb 3, 2014. The increased quarterly dividend will be paid on May 15, 2014, to shareholders of record as of May 1, 2014.

Financial Position

As of March 31, 2014, cash and cash equivalents of Aon was $338 million, down 29.1% from $477 million as of Dec 31, 2013. Total assets of Aon as of March 31, 2014 were $30.1 billion, down from $30.3 billion at end-2013.

Net operating cash outflow stood at $11 million in the quarter, compared with net operating cash inflow of $54 million in the year-ago period. This was attributable to organic growth and $64 million associated with some incentive compensation and interest expense payments.

Capital expenditures during the quarter declined 8.3% year over year to $55 million. Free cash outflow in the reported quarter was $66 million, compared with $6 million in the first quarter of 2013. The deterioration stemmed from a decline in cash flow from operations.

Long-term debt decreased to $3.67 billion as of March 31, 2014 from $3.69 billion as of Dec 31, 2013. However, the debt-to-capital ratio increased 230 basis points from 2013-end to 37.2% as of March 31, 2014.

Our Take

Although Aon's revenues did not match our expectation, earnings surpassed the Zacks Consensus Estimate and also improved on a year-over-year basis, primarily on strong Risk Solutions business and capital management initiatives.

Further, the recently announced dividend hike is slated to help Aon retain investor confidence. On the business strengthening front, Aon has allied with a financial guidance software company, HelloWallet, to help employers assist the financial security of their workers. With an expectation that 76% of the U.S. companies would expand wellness benefits beyond retirement in 2014, we expect this alliance to help Aon gain more clients and pave the way for more revenues.

Aon currently carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Some better-ranked stocks in the financial services space include Capital One Financial Corp. COF, World Acceptance Corp. WRLD and Tree.com, Inc. TREE. All three stocks carry a Zacks Rank #2 (Buy).