When stocks are added to widely followed benchmarks, such as the S&P 500 Index ($SPX) and the Nasdaq Composite ($NASX), it's generally seen as a positive development. First, being a member stock of these prestigious indices, alongside companies with strong legacies and reputations in their respective industries, can help to burnish a growing company's credibility and acceptance among the investor community.
Second, and on a more practical level, these new index entrants also attract new buying interest from the various funds and indices dedicated to tracking these market-leading benchmarks, which is generally expected to give a boost to their stock prices.
That's why there have been so many headlines - and such enthusiastic price action - surrounding the newly announced addition of Palantir Technologies (PLTR) and Dell Technologies (DELL) to the S&P 500 Index later this month.
However, there's been conspicuously less enthusiasm around Erie Indemnity (ERIE), which is also joining the SPX alongside Dell and Palantir before the open on Sept. 23. On Monday, investors reacting to the news sent DELL 3.8% higher, while PLTR spiked 14% on the session. Meanwhile, ERIE gave up early gains to close flat.
Longer term, though, it's worth pointing out that ERIE's three-year return of 176% not only puts the broader S&P 500 (+23.9%) to shame; it significantly outperforms PLTR (+21%) and even close challenger DELL (+112%), too. Here's a closer look at this standout dividend stock that's set to graduate to S&P 500 status.
About Erie Indemnity Stock
Founded in 1925, Erie Indemnity (ERIE) is a property and casualty insurance company headquartered in Erie, Pennsylvania. The company offers a wide range of personal and commercial insurance products, including auto, home, life, and business insurance. ERIE's market cap currently stands at $26.5 billion.
True to form, ERIE stock has been on a tear in 2024, rising nearly 50% on a YTD basis to outpace the broader market by a wide margin. Over the past 52 weeks, the stock is up more than 77%, and ERIE set a new all-time high of $536.96 earlier this week.
Erie Indemnity pays a quarterly dividend of $1.28, which works out to a relatively modest dividend yield of 1% at current levels. Notably, Erie has been raising dividends consistently for the past 13 years, backed by a sustainable payout ratio of 48.74%.
Erie's Earnings Growth
Erie has displayed impressive growth rates in revenue and earnings over the past five years. In this period, while the company's revenues have clocked a CAGR of 7.86%, earnings have compounded at a rate of 11.64%. Further, over the past five quarters, Erie's EPS have missed Wall Street's consensus estimates only once.
For the three months ended June 30, Erie's operating revenues were $990.4 million, up 18% from the previous year. Top-line growth was led by a 20% year over year increase in the company's core management revenues, which reached $777.9 million. Q2 EPS rose by 39.1% to $3.13, crushing the consensus estimate of $2.55.
Net investment income rose to $16 million in Q2, up from $13.5 million in the year-ago quarter. The combined ratio, a key indicator of profitability for insurance companies, also improved during the first half of 2024, declining to 111.1 for the period. That compares favorably to 120.8 in the first six months of 2023, and 113.7 for 1H 2022.
ERIE closed the quarter by bolstering its cash balance from $144 million at the start of the year to $170.6 million, and the company maintains a strong balance sheet.
Insurance Industry Tailwinds
The property and casualty insurance market in the U.S. is expected to reach $3.8 trillion by 2032, expanding at a CAGR of 8.3% in this period.
Erie's market share of 1.05% represents a substantial and strategic regional stronghold. may not seem much but it still makes it one of the top 20 players in the industry. Additional context should also be taken into account that the top 5 players have a market share of 6.5%.
The company's position as an affordable insurance provider in one of the most expensive auto insurance markets, Pennsylvania, gives it a clear edge over competitors and makes it a preferred choice for consumers. It also consistently ranks among the cheapest home insurance providers across a range of policies. On average, its home insurance rates are $804, while car insurance rates stand at $1,356.
This pricing strategy offers the company increased flexibility, allowing it to maintain competitive rates without sacrificing profitability for volume. As a result, it has seen a 21% rise in new policies and an 8% increase in policy renewals, reflecting higher premium growth.
Erie also reached a milestone of 7 million policies in force during Q2, just three years after reaching 6 million.
What Do Analysts Say About ERIE Stock?
With limited coverage so far, Erie stock seems like a good candidate to garner more positive attention from analysts after its addition to the S&P's most widely followed benchmark.
Out of two analysts in coverage, William Blair rates the stock “Outperform,” while one smaller firm in coverage considers ERIE a “Hold,” for a “Moderate Buy” consensus. Neither firm maintains a current price target for Erie shares.
