Essay Example on Comparing Apollo Global & American Financial Group: Key Insights for Investors

Introduction

Apollo Global Management (AGM) is an American multinational corporation that offers capital management services. The company, in this regard, invests and manages funds on behalf of individual and institutional investors, pension schemes, and SACCOS. American Financial Group (AFG), on the other hand, provides insurance products that protect businesses and clients from adverse risks. AFG’s insurance products are vital in today’s ever-dynamic business environment where exposure to financial risks is changing. The relationship between the two companies, their investors and employees are critical for their financial performance.

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Investor and Employee Relationships

AFG recognizes that human resources are an integral part of its business. For this reason, the company is focused on developing a rewarding work environment that also allows the employees to build their talents and explore their potentials (AFG, 2018). The number of employees at Apollo has continuously increased over the last two decades. Currently, AGM has nearly 500 investment experts and more than 1,450 professionals (AGM, 2018). AFG, on the other hand, has more than 8,500 employees throughout Europe and North America (AFG, 2018).

AGM and AFG have strong business relationships with their employees. Apollo is committed to meeting the needs of its employees (AGM, 2018). In turn, human resources ought to use their skills, knowledge, and expertise to achieve the goals of the organization. The relationship between the two American corporations and their employees is built on trust, integrity, and effective communication. This aspect enables AGM and AFG to share the same goals with its human resources by maximizing the effect of working together. Such a connection translates to building a successful, profitable business.

Research has demonstrated that good employer-employee relationships impact the financial standing of the company and its profitability, although it may not affect profits directly (Chi & Gursoy, 2009). The three main ways in which good relations between human resources and the organization influence financial performance are from the perspective of higher productivity, greater customer satisfaction, and lower employee turnover (Huselid, 2005). These factors have had a strong impact on the financial status of AGM and AFG (Chi & Gursoy, 2009).

Investors are vital to the financial viability of the two American companies. Apollo's corporate culture value the relationships between the organization and its investors (AGM, 2018). In brief, AGM believes that robust relations that it has with its investors have helped it to create lasting value for them (AGM, 2018). Investor relations is essential to any business entity as it ensures that there is fair trading of stock in the financial market. Corporations ought to disclose vital information that allows investors to make informed investment decisions. Apollo and AFG publish their annual financial statements as required by the Security and Exchange Commission (SEC). However, AGM has better investor relations than Apollo.

In recent years, SEC fined AGM $50 million for issuing misleading financial statements (Gholami & Habibi, 2012). The company also defaulted interest payments after securing a loan that it did not disclose to its investors (Gholami & Habibi, 2012). This phenomenon adversely impacts AGM’s financial performance as it discourages investors from investing in the company.

Outstanding Issues

AGM has a pending lawsuit against its two former executives. The company alleged that the two managers used Apollo's confidential information to help other parties to start a rival firm called “Caldera Holdings” (Louch, 2020). The two executives also used their managerial positions at AGM to help the new competitor to find investors. To Apollo, these managers wanted to harm the business for selfish interests. Caldera Holdings and the accused, managers, on the other hand, argued that AGM’s lawsuit is part of its anti-competitive strategies aimed at controlling the market (Louch, 2020). Also, Caldera Holdings believe that Apollo envies its former employees who used their expertise to help build another insurance business.

This outstanding issue may have a significant impact on the financial performance of Apollo since the underlying litigation costs can lead to a loss. In the income statement, Apollo records the issue as a contingency liability. The outcome of the lawsuit determines whether the event will lower the profitability of the company. In a scenario that Apollo Company bears the litigation costs and the underlying fines, the outcome will harm its financial viability.

In the first quarter of 2020, AFG recorded a net loss of $301 million (AFG, 2020). However, the company is yet to pay $7 million owed to Neon, a Lloyd’s-based insurer (AFG, 2020). If AFG is to pay this amount in the next quarter, it may lose its financial ability to maintain service levels. Also, it may render the company unable to generate sufficient income that can cover other debt commitments and meet operating payments.

Comparing Financial Performance of AFG and AGM

AGM and AFG’s Net Income

Common-Size Income Statement Items

AFG's net income has continuously increased over the last three years. In contrast, the net income of AGM increased over four years, except in 2018, when the company posted a loss of $28.5 million (AGM, 2019). However, AFG's operating expenses consume a significant proportion of the organization's total revenue. In 2019, for example, its total expenditures consumed 88.66% of the total sales, while that of AGM accounts for 71.45% of the total revenue (AGM, 2019) (see figure 1). Since sales figures of the two American companies vary significantly, their common-size income statements can help understand the trend of the net income in relation to sales (see figure 2). As is evident in figure 2, the net income of AFG is relatively stable compared to AGM. The common-size income statement in figure 2 suggests that AFG derives a significant proportion of its revenue from sales than AGM does. In this regard, AGM also derives considerable income from interests.

AGM’s Leverage Ratios

AFG’s Leverage Ratios

AGM has a high gearing ratio, while AFG has a low leverage ratio. This phenomenon implies that whereas AGM depends on debt to finance its activities, AFG uses equity financing. In 2019, AGM's total debt was twice the value of the shareholders' equity. In the same year, AFG’s equity was three times the value of debt. As such, the relative level of debt load at AGM is significantly higher than in AFG. This aspect means the risk of bankruptcy at AFG is low.

The two companies pay dividends. However, AFG pays more dividends than AGM. In 2018, AFG's basic Earnings per Share (EPS) was $5.96, and it grew to $9.98 in 2019 (AFG, 2019). Basic EPS for AGM, on the other hand, was $3.72 in 2019 (AGM, 2019). The company had a negative EPS in 2018 since it recorded a loss.

Investment Recommendation

Investing in stock, among other financial assets of a company, provides an opportunity for investors to get capital gains and dividends. However, potential investors must commit their resources in well-performing and financially stable companies. The reason is that capital gains and dividend payments are not guaranteed as the value of financial assets can fall significantly, and a corporation can also make a loss. When choosing an investment potential, it is necessary to consider the reputation of the management, the level of business risk, dividend policy, and price-to-earnings ratio. Based on these factors, the American Financial Group is a potentially rewarding company, and potential investors should invest in this company for several reasons. First, AFG has higher EPS, meaning the corporation is capable of generating higher dividends for its investors. Secondly, potential risk at AFG is low as the company depends on equity financing. Thirdly, AFG’s management has a good reputation, meaning stakeholders trust how the executives manage finances. Fourthly, the company has stable sales. At the same time, AFG did not make a loss over the past four years, unlike AGM. This aspect suggests that AFG’s investors are more likely to receive dividends than their counterparts at AGM. The company can also meet its debt obligations as it has favorable current ratios and good profit margins.

References

AFG. (2019, December 31). Annual financials for American Financial Group Inc. https://www.marketwatch.com/investing/stock/afg/financials/balance-sheet

AFG. (2020, May 1). Apollo Global Management, Inc. reports first quarter 2020 results. https://www.apollo.com/~/media/Files/A/Apollo-V2/press-release/earnings-release-1q-2020.pdf

AFG. (2018, May 21). Overview of American Financial Group, Inc. https://www.afginc.com/indexAGM. (2019, December 31). Annual financials for Apollo Global Management Inc. https://www.marketwatch.com/investing/stock/apo/financials

AGM. (2018). How we serve investors at Apollo Global Management. https://www.apollo.com/about-apolloChi, C. G., & Gursoy, D. (2009). Employee satisfaction, customer satisfaction, and financial performance: An empirical examination. International Journal of Hospitality Management, 28(2), 245-253. https://doi.org/10.1016/j.ijhm.2008.08.003

Gholami, R., & Habibi, A. (2012). A statistical approach to analyze Economic Net Income as a measure of the financial performance of private equity Firms: A case study of Apollo Global Management, LLC. ZENITH International Journal of Business Economics & Management Research, 2(9), 223-237. http://www.indianjournals.com/ijor.aspx?target=ijor:zijbemr&volume=2&issue=9&article=021

Huselid, M. A. (2005). The impact of human resource management practices on turnover, productivity, and corporate financial performance. Academy of Management Journal, 38(3), 635-672. https://doi.org/10.5465/256741

Louch, W. (2020, February 4). Apollo sues two more executives in a dispute over insurance rival. https://www.penews.com/articles/apollo-sues-two-more-executives-in-dispute-over-insurance-rival-20200204?mod=topStories