Wednesday, March 29, 2017

Next 2017 Dividend Machine an insurer

I have found my next Dividend Machine.  A Dividend Machine to me must meet my minimal criteria to be included in my long only target 2017 portfolio.  I don't trade these stocks, I don't sell calls on them, I don't reinvest the dividends.  The stocks I pick for  my target portfolios are long only.  By tracking my long only portfolios, income investors  can simply measure how well we do over time when we carefully select income stocks and stick with them.

In this post I am writing about insurance stocks.
  • With a low P/E (price earnings ratio) in a high P/E environment.
  • Dividend yield must beat the yield on a 10 year U.S. treasury bond.
  • Analysis of dividend growth tips the scale as to which stock will be added to the 2017 portfolio.

Low P/E stocks

The S&P 500 index has a P/E of about 26.25 (source and Barron's.)  The universe with low P/E's is the insurers.  According to the property and casualty industry P/E ratio is about 9.26 using the 4th quarter of 2016 data.  

Without a doubt,  not all insurers have low P/E's.  The universe is quite large,.  Some have P/E's in the triple digits. I looked at no fewer than 20 stocks with P/E's less than the S&P 500.  I found none with P/E's as low as 9.26. The seven stocks I evaluate in this post have P/E ratios ranging between 11.74 and 21.86.  All are below the S&P 500 average.  See the P/E comparisons of seven insurance stocks I include in this post below.

I also like the fact that insurers should benefit from increasing interest rates.  Interest rates have declined a touch lately but the Federal Reserve will continue to raise as inflation and tight labor markets demand.  I don't expect explosive interest rate increases just steady increases.  Insurers are like banks and benefit when they can earn more money from increased interest rates.

Dividend Yield

If you are an income investor, you are by definition prone to conservative investing. You tend to be risk averse and prefer safety.  We older folks yearn for the period when we could get a U.S. treasury above 10%.   We do not have the time to wait for 10% US Treasury yields so we go with lower yields but since we are taking risk, we have to get something more than the US treasury which is about 2.3%.  

Dividend yield is the metric that narrowed my list to 3 stocks.  You will see in the table below the dividend yield of all seven stocks that all criteria  divided into those whose yield beats the U.S. treasury and those whose yield does not.  The dividend yield range of the three stocks I present below is 2.77% - 3.46%.  See the table below.

Dividend Yield Growth

We are not looking at a dividend stock that is also a growth stock, one that would command call premiums, we are looking for a steady, safe dividend growth stock.  Without the ability to juice our income with covered calls, we have to invest for future income growth.  The 3 year dividend growth rate of the seven stocks ranges between 3.17% and 61.11%.

FAF doubled their dividend in 2014 and I find it highly unlikely that it will double it again soon.  However, their most recent dividend increase, three quarters ago, was above 30%: 34 cents from 26 cents.  However, the two prior the dividend increases were just a penny. 

 If we buy all of them, we are pretty sure our income will go up over time. The question here is which single stock should I pick for the 2017 target portfolio?  The answer is revealed later in this post. 

One stock Baldwin and Lyons, symbol BWINB meets all my criteria except dividend growth so although I thought it would be included in an earlier version of this post, I am counting on my dividend stocks to increase my income and therefore, I eliminated BWINB from consideration.


Comparison of Dividend Machine Criteria 

I mentioned the universe of insurance stocks is quite large.  I was surprised to find stocks like Aflac not make the hurdle.   Aflac has negative revenue growth. Traveler's has anemic revenue growth as well.  AIG has negative EPS.  Progressive has an odd dividend policy.  James River Group looks promising but has only a 2 year dividend history.

My 2017 Dividend Machine criteria are presented in the table below.  

I am presenting the Dividend Machine Fundamentals for the three stocks that meet all criteria except for call option opportunities.

First American Corp. symbol FAF.   FAF is a title and specialty insurer. 

FAF has a history of only 6.8 years; chart source: Nasdaq

stock chart


HCI Group is a property and casualty and re-insurer that found its mojo over the past 5 years or so.  The chart below is 8.5 years and the table shows HCI to have very attractive dividend growth.

HCI 102 month chart source: Nasdaq

stock chart


If you read this blog, you are familiar with Cincinnati Financial, CINF.  It was a Dividend Machine in 2012 and 2013.  CINF is a property and casualty insurer.  Technically, CINF made the grade but among these four stocks, CINF has the lowest yield, the lowest dividend growth rate, and the highest P/E but, it also has the best revenue growth.  If you believe that revenues drive dividends, you want to pay attention to this stock.  CINF Dividend Machine fundamentals are presented below as is their 10 chart.

CINF - 10 year chart source :Nasdaq

stock chart

Future Income Analysis:


This is a tricky subject.  Sophisticated analysis would include a net present value analysis that I think would bore my readers.   I chose to make it as simple as possible.  First I calculated how much dividend you would receive for $1 invested in each of  the seven stocks.  Then, using the dividend growth rate, I calculated how much your $1.00's worth of dividends would grow.

I analyzed all seven stocks because you may want to see how each stock would perform.  I also have to note that I think the FAF dividend growth is unrealistic.

This final table shows you the change of income I am expecting from each stock.

My Take:

The analysis tells me that HCI will deliver the most income now and in the future should FAF not live up to its past.   I will add HCI to the 2017 target portfolio as well as to my own portfolio.  By the way I already own Maiden Holdings, MHLD, a re-insurer as well as, Mercury Insurance, MCY a property and casualty insurer. MHLD was a 2014 and 2015 Dividend Machine but no longer qualifies because EPS are less than dividend paid out.  MCY is in a similar situation EPS are less than dividend paid out. 

Only you can decide if you want to add an insurer to your portfolio.  If you do decide to add stock in this industry you have many quality choices.  If, like me, your major goal is to retire with income that grows, then HCI is a good bet.

M* MoneyMadam

 Disclosure:  Expect to add HCI soon.