Cincinnati Financial: A Dividend King in 2012
Christopher is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The Cincinnati Financial Corp. (NASDAQ: CINF) is one of the 25 largest property and casualty insurers in the United States and is able to operate against mainstream competitors such as Progressive (NYSE: PGR), Allstate (NYSE: ALL) and American International Group (NYSE: AIG) through a business model that employs direct sales through agents that work with the members of their immediate community.
Cincinnati Financial was formed in 1968 and currently owns four insurance subsidiaries as well as two subsidiaries that specialize in financial services. Its proven dependability and increasing sales numbers will allow the company to maintain its attractive dividend of 5% while also showing a positive outlook for its stock’s long-term value.
By using local agents who work from their homes, Cincinnati Financial is able to save money that its competitors must spend on advertising campaigns and customer acquisition. It still maintains a lower gross margin than Allstate and Progressive, however, at 6% compared to 14% and 10%, respectively. Nonetheless, Cincinnati Financial’s smaller scale operation allows it to work with minimal interference from its competition. It builds and maintains personal relationships with clients through its direct approach, which is designed to provide strong benefits to its network of agents and great customer service to its customers.
Cincinnati Financial provides a broad range of products that fit the needs of individuals and businesses alike. It sells automobile, home and life insurance to individuals while offering a range of business products as well. It prides itself on the ability to customize its policies to meet the needs of businesses and cover areas such as worker’s compensation, general liability, loss of income, property insurance, transportation insurance, commercial automobile insurance and more. The diversity of its products and ability to conform policies to the needs of its clients give it an edge against larger insurance companies.
Where Cincinnati Financial fails against its larger competitors, however, is against the internet initiatives of Progressive and Allstate’s recently acquired Esurance, which provide quotes to customers of competitors’ rates as well as their own. Instead of focusing on its competitors’ rates, Cincinnati Financial has built its reputation on its tailor-made policies that address the individual needs of each client, giving it a slight edge against the “cookie cutter” policies that larger insurance companies have become known for. In its last three complete fiscal years, Cincinnati Financial Corp. has averaged $412 million in net profit per year and consistently passes on a portion of its profit to its shareholders in the form of quarterly dividends.
Cincinnati Financial has paid just over $0.40 per share in dividend payouts per quarter, for a total of $1.61 per share over the past year to yield almost 5%. Its quarterly dividend structure allows income investors to compound returns much more quickly than dividends that pay biannually or annually, which gives it an added advantage in the dividend reinvestment game. Its payout ratio of 1.64 is a slight concern that will correct itself in 2012 based on the company’s most recent earnings report, which blew away analyst expectations and showed a growth of 23% in earnings per share and a 92% increase in underwriting profit, which marked its most successful quarter in four years.
Its fourth quarter results showed increases across the board with gains in five key areas. Its collected premiums were up 6% to $827 million and its total revenue was $955 million, a 2% gain from the same quarter in its previous year. Its operating income and earnings were both up, as previously mentioned, posting an increase of 23% in each area. These gains make Cincinnati Financial appear even more attractive heading into 2012, where I believe it has the chance to pass on some of those gains to its shareholders.
Its stock also provides great short-term and long-term benefits from an income investor’s perspective due to its bullish trend over three years and its tendency to experience drops in between its gains. The stock value grew from $18 per share to $33 over three years but showed a low of $24 and a high of $34 over the last twelve months. Despite the fluctuation in share price, its dividend has consistently paid out at $0.40 per share, giving income investors the added benefit of reinvesting their dividends while the stock sells at a lower prices and providing reliable gains in the long run.
I believe that this is a perfect buy in 2012 that will show results in the long run through an appreciation in value with the added advantage of reinvestment at no additional cost over the short term between growth spurts.
Compared to its competition, Cincinnati is much friendlier to shareholders. Allstate provides a dividend yield of about 3% while Progressive provides under 2%. American International Group hasn’t provided a dividend since 2008 when it released two dividends in excess of $3.35 per share. I believe that sustainable growth, a proven track record, a positive outlook toward Cincinnati Financial’s long-term growth and its 5% yield make this a dividend king that has shown stability in an extremely competitive insurance market.
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