Insurance companies can be some of the harder stocks for retail investors to figure out with their industry-specific language and reporting measures, exposure to dozens of markets and regions, and volatility tied to interest rate changes and macroeconomic conditions. But for those investors willing to do their homework, I believe speciality insurance broker Jardine Lloyd Thompson (LSE: JLT) may prove an under-valued stock offering a steady dividend and considerable growth potential.
JLT's core business is serving as a middle-man between insurers and customers seeking speciality insurance policies. The company has made itself a go-to leader in the niche market and in 2016, this segment accounted for 60% of group revenue and is growing at a steady clip of 3-4% per annum.
On top of the speciality insurance broking business, JLT also serves as a reinsurance broker and provides advice and services for employee benefit plans. This set of offerings makes JLT's services incredibly sticky, which leads to high levels of recurring revenue, the ability to cross-sell services to clients, and enviable pricing power.
In addition to steady organic growth in core markets slightly ahead of GDP growth as it consolidates the fractured speciality insurance broking market, JLT has very good growth prospects in the US and emerging markets. The company's new US operations are currently loss-making but as the business scales up and brings on board new customers it is expected to turn a profit by 2019. Elsewhere, fast-growing divisions in Asia and Latin America are already profitable and earn margins in line or above group average.
The company also generates impressive cash flow with operations kicking off £141m last year from £1,261m in revenue. Last year this excess cash flow was mainly returned to shareholders through £18m in share purchases and £66m in dividends that at the current share price represents a very nice 2.7% yield.
While JLT's shares are slightly expensive at 20 times forward earnings, its solid and growing dividend combined with very good growth prospects have it at the top of my watch list.
Lighting up the market
Another growth share flying under the radar of many retail investors is professional lighting manufacture, designer and supplier FW Thorpe (LSE: TFW), which provides lighting displays for everything from car dealers to train stations and retail stores.
The business has grown nicely in recent years through small bolt-on acquisitions and expansion into new markets across the UK, Europe and Asia. Thanks to organic growth and the weak pound, the company reported a very, very nice 23.8% year-on-year (y/y) rise in H1 sales to £51.2m. Y/y operating profit growth was a bit lower at 19.7%, due to a large order that necessitated extra overtime, but this appears to be a short-term blip and increased orders are, after all, to be welcomed.
There are still problems with the company's UAE operations but management is confident that the Australian business is now primed for a period of good growth. Expansion in these markets, together with the constant rollout of new products, bodes well for the company's future. Unfortunately, its shares are very pricey at 30 times forward earnings. But should that valuation come down, I'd be more interested.
If FW Thorpe is a bit pricey for your taste, you'll probably prefer the Motley Fool's Top Small Cap of 2017, which trades at just 7 times forward earnings. On top of a bargain basement valuation the company also offers growth potential as evidenced by its record of four straight years of double-digits earnings growth.
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Ian Pierce has no position in any shares mentioned. The Motley Fool UK owns shares of FW Thorpe and Jardine Lloyd Thompson. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.