-Cincinnati Financial Corporation (CINF) is a large national insurer.
-Dividend Yield: 5.5%
-Revenue and Earnings were badly impacted by the economy, but have stabilized, and the dividend is well-covered.
-With a P/E of under 11 at the moment, I consider CINF to be a stock worth looking at.
I recently did an analysis of Harleysville (HGIC), an insurer that is currently in my portfolio. Consider reading that analysis to compare with this analysis.
Harleysville Group Inc (HGIC) Dividend Stock Analysis
Cincinnati Financial Corporation (CINF) was formed in 1968, though its primary subsidiary, Cincinnati Insurance Company, was founded in 1950. CINF has 4,170 associates and operates in 37 states as of this writing. CINF currently owns 100% of three subsidiaries: Cincinnati Insurance Company, CSU Producer Resources, Inc., and CFC Investment Company. They also own their headquarters property and a large investment portfolio.
The premise behind an insurance company is that they spread risk out over a wide number of people and businesses. They collect premiums (payments) from clients and in return those clients are covered in case of a serious loss. From an insurance business standpoint, it’s ideal to collect more in premiums than you pay out for losses. This is not the primary form of earnings, though. An insurance business, after collecting all of the premiums, holds a great deal of assets that, over time, are paid out for client losses. An insurance company constantly receives premiums and pays out for losses, so as long as they are prudent with their business, they get to constantly keep this large sum of stored-up assets. As any investor reading this knows, a great sum of money can be used to generate income from investments, and that’s how an insurance company really makes money. CINF invests its stored up collection of assets (an $10.6 billion portfolio) in stocks and fixed-income securities.
The company sells its insurance products exclusively through independent insurance agents.
CINF brought in $3.1 billion in premiums in 2009. The breakdown was as follows:
1% excess and surplus
Their top five states for commercial premiums were Ohio, Illinois, Pennsylvania, Indiana, and North Carolina.
Their top five states for personal premiums were Ohio, Georgia, Indiana, Illinois, and Alabama.
CINF currently has a $10.6 billion portfolio. The breakdown is as follows:
$4.863 billion in Taxable Fixed Maturities
$2.992 billion in Tax-Exempt Fixed Maturities
$2.608 billion in Common Equities
$0.093 billion in Preferred Equities
$0.006 billion in Short-Term Investments
63% of their fixed-maturity portfolio is rated AAA, AA, or A.
29% of their fixed-maturity portfolio is rated BBB
5% of their fixed-maturity portfolio is rated BB or below.
3% of their fixed-maturity portfolio is unrated.
Their common equities holdings are broken down as follows:
18% in Healthcare
15.5% in Consumer staples
11% in Energy
11% in Information technology
10.2% in Financial
9.6% in Consumer discretionary
9.2% in Industrials
6.7% in Utilities
5.1% in Materials
3.7% in Telecom
Revenue, Earnings, Cash Flow, and Margins
Revenue shown is the sum of premiums earned, investment income, and realized investment gains. The annual revenue growth is less than 2% annually. This decline seems to be completely due to the economy. Their portfolio was hit hard, and they lost a small amount of their business over these last several troubled years.
Earnings growth has been slightly negative over these years, specifically due to the economic decline starting in 2007.
Book Value Growth
|Year||Book Value Per Share|
Book Value is a fairly important metric for valuing an insurance company’s stock. Like earnings, their book value has also experienced mildly negative growth.
Revenue, earnings, and book value growth look fairly bad in this perspective, but this time frame contains the economic crash which badly damaged insurance companies. CINF has taken damage, yet held steady and has kept its dividend. To put these numbers into perspective, look at the growth between 1999 and 2009:
Revenue: $2.128 billion
Earnings: $255 million
Revenue: $3.903 billion
Earnings: $432 million
This represents 6.3% average annual revenue growth and 5.5% average annual earnings growth. This is pretty good for the “lost decade” and even better once the large dividends are factored in. These numbers are fairly good even after an economic crash.
CINF has raised dividends for 49 consecutive years. The current dividend yield is just shy of 5.5%, which is quite a high dividend yield. The dividend is covered by earnings. Net income per share for 2009 was $2.66 with $1.57 being paid out in dividends. This gives a payout ratio of about 60%.
CINF has grown its annual dividend by an average of over 7% annually over these past five years. The most recent increase was very small, but the dividend yield is currently quite high and its respectable for an insurance company to be able to continue raising its dividend after such an economic beating. It shows that among the worst of possible scenarios, shareholders were able to preserve their income. If you notice, the company is trading with a very high dividend yield compared to previous years with the exception of 2009.
I don’t want to promote the idea that past performance is representative of future performance, but I want to take a moment to emphasize the power of dividend growth. According to CINF’s investor website, if you had purchased one share of Cincinnati Insurance Company before 1957 you would have had 2,146 shares of Cincinnati Financial Corporation in April 2005 if you had reinvested all dividends and taken into account all stock splits. That’s the power of a boring but growing dividend-growth company.
Between 2006 and 2008, CINF repurchased $566 million worth of its own stock. This represents about 12% of today’s market capitalization of CINF.
CINF carries a portfolio that would be considered conservative among individuals, but is rather aggressive compared to my current insurance company holding HGIC. As mentioned earlier, the majority of CINF’s portfolio consists of fixed-income securities, but they also hold a significant amount of dividend-paying stocks which gives them access to potentially better long-term rates of return.
CINF has a target of annual rate of growth in book value plus the dividend contribution set at 12% to 15% through 2014.
CINF currently has a price-to-book value of only slightly under 1. In comparison, a similar company HGIC has a price to book of 1.19. CINF is at a deeper discount than HGIC when it comes to book value.
CINF has a reasonably aggressive portfolio to grow their book value. Approximately 25% of their portfolio is invested in equities. Of this, their largest holding is Proctor and Gamble (5.8% of their equities portfolio), and their largest sector is Healthcare (18% of their equities portfolio). Out of their 46 equity holdings, 39 increased dividends in 2009 and the average dividend increase was 7.6%.
CINF is also working on growing premiums. The company entered Texas in 2008 and Colorado and Wyoming in 2009. They also significantly increased offerings in 7 states during the 2008-2009 period. CINF appointed 87 new agencies in 2009.
Even with what seems to be a more aggressive portfolio approach than some other insurance companies, (HGIC being my prime example), CINF has a solid financial strength rating. They are rated A+ by A.M. Best, A+ by Fitch, and A1 by Moody’s. This is greater than that of HGIC.
The company has a low valuation (P/E < 11), a high dividend yield (5.5%), 49 years of consecutive dividend increases, and tends to repurchase shares over time to further create shareholder value. This means that most of the returns are based on simply maintaining the status quo- the business does not have to expand much in order for the investor to generate reasonably attractive returns.
As an insurance company, CINF’s business is all about managing risk. Their dividend is well-covered, and most of the returns of this company have been in the form of dividends and share repurchases. CINF was hit harder by the economic collapse than HGIC, but it has fared better than several other insurers and has a good outlook on the future. If the economic recovery takes a turn for the worse, however, insurances companies like CINF will be hit hard again. CINF has to continually ensure that its insurance products are top-notch and that it maintains a good portfolio. As of the year-end 2007, CINF had 56% of their equity portfolio in financial stocks, which shows a lack of discipline or a poor understanding of their investments. They have since diversified their portfolio (now with only 10.2% of their equity portfolio in financial stocks), but if they get greedy at the wrong time again then it will impact their long-term portfolio performance.
Conclusion and Valuation
In conclusion, I am fairly positive towards CINF stock at this moment. I think it’s a good value as long as its stock price remains in the low-30’s or down into the 20’s as it is now. It has a P/E of less than 11 and a dividend yield of 5.5%. Most shareholder returns will be due to dividend payouts and share repurchases, and any business growth is a bonus. Not all of the information about this company is good news- they were hit hard in this recession, but coming into a hopefully improving economy, I feel that CINF represents a good bargain.
Full Disclosure: I do not own any shares of CINF at this time, though it is on my watch list.
You can see my full list of individual holdings here.
Check out analysis of other high-dividend-yield stocks:
Exelon (EXC) Dividend Stock Analysis
Brookfield Infrastructure Partners (BIP) Dividend Stock Analysis
National Presto Inc (NPK) Dividend Stock Analysis
8 Reasons to go with Dividends