Investors looking for companies with long histories of dividend growth should consider the Dividend Kings, which are stocks with at least 50 consecutive years of dividend increases, notes Bob Ciura, contributing editor to Sure Dividend, as he continues his countdown of favorite Dividend Kings.
This exclusive group contains just 35 stocks, proving that the Dividend Kings can be considered the “best-of-the-best” when it comes to growing dividends for long periods of time.
Read Part 1 of this special report here…
Read Part 2 of this special report here…
Cincinnati Financial Corporation (CINF) has one of the longest dividend growth streaks in the market at 60 consecutive years. Just a handful of companies can claim a longer growth streak. Besides offering a market beating dividend yield, Cincinnati Financial also looks poised to produce solid total returns.
Business Overview & Recent Results
Cincinnati Financial was founded in 1950. From humble beginnings it has grown into a leading insurance company. The $19 billion company provides life, auto, business, and property and casualty insurance, among others, to customers and generates annual revenue of $7.5 billion.
Cincinnati Financial reported third-quarter earnings results on October 27th, 2021. Revenue fell nearly 20% to $1.79 billion, but was slightly ahead of estimates. Adjusted earnings-per-share of $1.28 was a vast improvement from last year’s $0.39, well above analyst forecasts.
The year-over-year revenue decline was due to higher than usual catastrophe losses. In fact, catastrophe losses ran 4.4 points above Cincinnati Financial’s five-year average of 9.8%.
Despite this impact, the company’s combined ratio improved 1,100 basis points to 92.6%. This was driven by earned premiums of $1.59 billion during the quarter. Earned premiums were $60 million lower than expected, but a nearly 10% improvement from the previous year.
Revenue for the year is still up 30% even with the sharp decline in the third-quarter, demonstrating how strong Cincinnati Financial’s business has been this year. We expect that the company will see adjusted earnings-per-share grow 70% to $5.58 per share in 2021.
Competitive Advantages & Growth Prospects
The insurance business is competitive, as customer switching costs are very low. As a result, underwriters often have to issue policies at low rates. This can leave the insurer vulnerable if a high number of claims are filed.
One of Cincinnati Financial’s chief advantages of its peers is in its ability to lead the competition in terms of underwriting policy. Though catastrophe losses were higher than expected in the most recent quarter, they were largely in-line with many other peers.
Typically, Cincinnati Financial’s catastrophe losses have been well below the rest of the peer group. This has enabled superior performance for its combined ratio, the ratio of amount of claims paid to the amount of premiums received. Cincinnati Financial’s combined ratio has been well below its peer group over the long-term.
Like many insurers, Cincinnati Financial derives much of its net income from investment gains. Low interest rates have been a headwind for the industry as whole as bonds have had low yields, but this could change in the near future. The Federal Reserve has indicated that it plans several rate hikes in each of the next two years. Any movement higher in interest rates should flow right to the company’s bottom-line.
Cincinnati Financial differs from many peers in that it allocates a significant amount of capital into stocks, with $9.887 billion, or 42.6% of the company’s total investment portfolio, invested in common equities.
Nearly a third of the equity portfolio is invested in technology stocks, which may give some investors pause due to the volatile nature of the sector. Bear markets could be especially difficult with a position of this size invested in technology. Still, this sector often works well during periods of economic expansion.
Cincinnati Financial has leveraged its position as a leading insurer. Book value per share has risen by 11.4% since 2016. Management has a long-term goal of increasing book value by 10% to 15% per year.
Cincinnati Financial was not immune to the negative impacts of the last recession. Earnings-per-share fell 63% from 2007 to 2009 and it took several years for the company to make a new high. Earnings premiums were roughly the same during this period, but the combination of lower stock prices and low interest rates did hurt Cincinnati Financial’s bottom-line.
That said, Cincinnati Financial continued to raise its dividend during this time, though it was at a slower rate than before or after the Great Recession.
Valuation & Expected Returns
Given the tailwinds higher net premiums and investment performance, we expect that Cincinnati Financial will grow earnings-per-share at a rate of 8% per year through 2026. This is a discount to the compound annual growth rate of 18% for earnings-per-share since 2011.
Cincinnati Financial currently trades at 20.3 times our expectation for earnings-per-share for the year. This is very close to our target price-to-earnings ratio of 20. If the stock’s valuation were to revert to our target by 2026 then annual shareholders would be reduced by just 0.3% per year over that period.
That last component of total returns would be the stock’s dividend yield, which is currently 2.2% for Cincinnati Financial. The company’s dividend has a compound annual growth rate of 4.5% over the last decade.
Altogether, we expect total returns for Cincinnati Financial to be 9.9% per year for the next five years, stemming from an 8% earnings growth rate and starting dividend yield of 2.2% that are offset by a small headwind from valuation reversion.
Final Thoughts
In order for a company to raise its dividend for a long period of time, it must have a sound business model and advantages that separate it from its peer group. Even then, a hiccup anywhere in the business, such as a recession or a company specific issue, can lead to the end of the dividend growth streak. This is why there are less than 40 companies in the entire market that have at least five decades of dividend growth.
Cincinnati Financial has weathered multiple recessions and continued to raise its dividend for 60 consecutive years because of its strong underwriting performance, ability to increase the number of premiums earned and its aptitude for navigating rough markets. These are characteristics that helped make the company a Dividend King.
Cincinnati Financial is projected to provide nearly double-digit total returns over the next five years in addition to a market-beating dividend yield. Those looking for high potential returns and secure income could find Cincinnati Financial an attractive dividend stock for 2022.
