Why Progressive Can Produce More Than Just Witty Insurance Commercials

The first thing that may come to mind when you think of Progressive (NYSE:PGR) is one of the company's humorous television commercials. But outside the strange brand of humor is a strong brand of insurance that has quietly propelled Progressive's stock price to fresh all-time highs.

The Ohio-based property and casualty company is not only taking on Geico and other competitors in the clever advertising department but emerging as one of the country's leading insurance businesses.

Progressive's primary performance driver in 2020 has been the noticeable lack of cars on the road. But a peek under the hood reveals a financially strong company that can continue to generate growth for years to come.

What is Progressive's Long-Term Financial Track Record?

Progressive sells insurance for personal and commercial cars, trucks, motorcycles, boats, and RVs though independent agencies as well as its own website. As the nation's third largest auto insurer it resides in the value segment of the property-casualty insurance market competing on price, claims accuracy, and operational efficiency. New York, New Jersey, Florida, and Michigan are considered its key geographic markets.

As you'd expect, Progressive's strategy to gain U.S. market share is largely based on having deep advertising pockets. It’s a strategy that has worked well in recent years.

Marketing success has helped the company build a five-year sales growth track record of 15%. And despite the sizeable ad budget, bottom-line growth has been even stronger—30% over the same period. Progressive's 29% return on equity (ROE) separates it as one of the strongest stocks in the financial sector.

Although Progressive chose to suspend its stock buyback program amid the pandemic, it has maintained its dividend payout. The current quarterly dividend of $0.10 may not seem exciting but has been increasing in recent years.

And Progressive certainly has the balance sheet to back it. A declining debt-to-capital ratio of 23% speaks to the insurer's industry-leading financials.

How Was Progressive's Latest Quarter?

Light traffic is generally a good thing for drivers—and it's a really good thing for insurance companies like Progressive. From the onset of the pandemic, fewer cars on the road has meant lower auto claims and been a boon to Progressive's recent performance.

Meanwhile, those that have taken to the roads have also taken a liking to Progressive's Snapshot program which monitors driver activity and can lead to reduced customer premiums.

Price increases have also contributed to performance. They helped Progressive's third quarter revenues to a consensus topping $11.02 billion. Earnings per share rose 82% to $2.59 and also beat the Street.

For the month of September, Progressive's policies in force, i.e. the number of insurance contracts outstanding, increased 11% to 24.4 million. This was led by a 14% rise in the direct auto channel, an encouraging sign in today's increasingly e-commerce driven economy—and confirmation that the silly ads are driving people to the Progressive website.

But nowadays Progressive is more than just auto insurance. As you may have heard company spokeswoman Flo describe, Progressive offers bundled home and auto insurance. The company's entry into the home insurance market should continue to be a favorable diversifier and growth driver. The recent momentum in the U.S. housing market bodes well for near term performance.

However, a big challenge for Progressive and its peers will be to offset the low level of income generated by its investment portfolio due to the current ultra-low interest rate environment. Nearly 90% of Progressive's $45.8 billion investment portfolio is invested in fixed income or held in cash.

Healthy investment results are important to Progressive because it allows the company to set aside more loss reserves—which in turn softens the blow in the event of catastrophe losses.

Is Progressive Stock a Buy?

Progressive shares edged lower in a down market following this week's report. The stock is still trading near its all-time split-adjusted high of $102.05, but its 13x trailing P/E ratio is below the company's five-year average (and well below that of the broader market). Combined with Progressive's financial strength and relatively predictable growth outlook, this makes it an interesting growth and income stock.

In the near-term, both the highway traffic and Progressive's insurance payouts will likely remain light. This will continue to make the auto insurer a unique way to invest in pandemic beneficiaries.

In addition, the impact of rising car sales will be an interesting theme to watch as the pandemic unfolds. As more people shun air travel and public transportation in favor of buying new and used vehicles, Progressive should gain a wider, value-conscious consumer base to which to offer its policies.

Eventually as economic conditions normalize and more cars return to the road, Progressive will probably see its margins contract, but that is likely several quarters away.

Long term investors can expect reliable mid-single digit earnings growth and a steady dividend from Progressive. The entertaining commercials aside, this stock can be a low volatility way to generate portfolio growth and income in an uncertain market.