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Old Republic International’s (NYSE:ORI) stock has dropped 12% in the past month, leading some to overlook its potential. However, a closer examination of the company’s financials may reveal its true value. Since fundamentals drive long-term market outcomes, it’s worth delving into Old Republic International’s return on equity (ROE), which reflects how effectively the company is growing its value and managing investors’ funds.
ROE is a measure of a company’s success in turning shareholder investments into profits. It is calculated by dividing net profit from continuing operations by shareholders’ equity. Old Republic International’s ROE is 11%, meaning that for every $1 of shareholder investment, the company generates a profit of $0.11. Looking at the company’s ROE provides insight into potential earnings growth.
Companies that have a high return on equity and profit retention tend to have a higher growth rate than those that don’t. Old Republic International’s ROE seems decent, even when compared to the industry average of 12%. This puts the company’s moderate net income growth of 18% over the past five years into perspective. Additionally, comparing the company’s net income growth with the industry reveals that it exceeds the average industry growth of 14%.
Earnings growth is vital for stock valuation. Therefore, investors must determine if the anticipated earnings growth is already reflected in the share price. Old Republic International is reinvesting a large proportion of its profits at a high rate of return, which has led to substantial earnings growth. However, the latest analyst forecasts indicate a slowdown in future earnings growth.
Old Republic International has a healthy combination of a moderate three-year median payout ratio of 28% (or a retention ratio of 72%) and growth in earnings, indicating it is efficiently reinvesting its profits. When adding that the company has paid dividends for at least ten years and plans to increase the payout ratio to 38% over the next three years, investors can see that it is committed to sharing profits with shareholders.
In conclusion, Old Republic International appears to be a solid company when evaluating its financials, particularly its ROE. While it may have seen recent stock dips, this may be a temporary occurrence. Encompassing a long-term perspective, the company is worth considering for potential earnings growth. However, investors should continue monitoring the analysts’ forecasts to ensure that the stock remains fairly valued compared to industry standards.
