Building my Dividend Porfolio - PartnerRe Limited
Karin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
This is part two of a ten-part series, which I will be publishing every week until the entire portfolio has been introduced. You can see Part One here, where I discussed my first addition, Abbott Laboratories.
Since I’ve become interested in dividend-paying companies, and I am constructing a model portfolio of my own that I am presenting to the Motley Fool community, I plan on digging deeper into individual companies that are working their way to the top of my list. I plan to introduce one individual company each week until I have added ten companies to my initial portfolio. I will add from there as funds permit and as I discover new companies worth adding.
I review each company on seven different criteria: yield, number of years paying and raising dividends, 5-year Dividend Growth Rate (DGR), 5-year projected Earnings Growth Rate (EGR), total return for the past twelve months, PE, and payout ratio.
I constructed a rating system that awards points for each of the previous criteria. A “perfect” score would be 28 points, with 4 points awarded for all seven categories. The highest score that was realized by any company that I have examined so far is18, and it was awarded to PartnerRe Limited (NYSE: PRE).
PartnerRe is in the reinsurance business, offering policies to companies to cover property damage and business losses. It offers homeowner policies, third party liability policies like employers liability, workers compensation, and employee injury.
In terms of its potential as a dividend-generating stock, I took a look at the current dividend metrics. PartnerRe’s yield is 3.1% and it has a 19-year history of paying and raising dividends. The last raise was on Feb. 17, with an increase of 3.3%. The company pays out a very reasonable 27% of its earnings as dividends, making the current dividend quite sustainable.
The company’s 5-year DGR is 9.1%, which exceeds my threshold of 7.0%. The earnings growth rate as estimated by the 20 analysts who cover the company is 9.0%, as compared to the growth rate for the industry of 12.2% and 10.5% for the sector. (The S&P 500 5-year EGR is currently 9.1%).
PartnerRe’s earnings estimate for FY 2012 (reported January, 2013) is $9.12, compared to last year’s loss of $9.50.
The company has a TTM PE of 5.6, based on today’s price of approximately $82. This PE is far lower than the industry PE of 17.0 and the sector PE of 13.7, as well as the S&P's PE of 15.5.
PartnerRe’s margins are far better than the competition’s: its five year average pre-tax margin is 12.9%, versus an industry average of 7.8%; five year average net profit was 10.6%, versus the industry average 4.8%; five year average ROA 2.6% versus 0.8%; and five year average ROI 7.9% versus an industry average of 3.4%.
Total debt to equity for the MRQ is 0.12, compared to 0.39 for the industry and 0.96 for the S&P 500. Interest coverage is a hefty 25.3, compared to an industry ratio of 5.1, indicating PartnerRe is well-positioned financially to manage its current debt load.
PartnerRe is currently trading at about 3% less than its 52-week high of $84.85, reached in November, and up 33% from its low of a year ago. Its twelve month total return is 32.7%.
In September, the Board of Directors authorized a share buyback program of 6 million shares, which is on top of the 4.3 million shares that the company repurchased during the first eight months of 2012. Share repurchases aid book value and earnings-per-share figures, and are a way of returning profits to shareholders in addition to dividends.
The Motley Fool community rates PartnerRe a five-star CAPS pick, with 162 Bulls and 6 Bears. The 20 professional analysts who cover the stock rank it a 2.6 (1.0 = Strong Buy, 5.0 = Sell), with 2 Strong Buys, 6 Buys, and 12 Holds. They have assigned an average target price of $85.86.
I also looked at another dividend-payer in the insurance industry, Aflac (NYSE: AFL). I know that AFL is an extremely popular stock for dividend portfolios, but here’s how it lines up according to my criteria:
Aflac currently yields 2.8% and has been paying and raising dividends for 30 years. Its 5-year average DGR is a fantastic 17.5%, and its 5-year estimated EGR is 10.8%. The company sports an attractive PE of 8.8, a dividend payout ratio of 23%, and has a twelve-month total return of 25.9%.
Aflac’s main trouble spot on my list is its dividend yield, which is lower than my 3.0% threshold. If Aflac paid a larger dividend, it would for sure be in my model portfolio. Unfortunately, it doesn’t, so I have to exclude it at this point. In order for the yield to met my criterion, the price would have to drop by 14%, down to approximately $46 per share. I’ll keep an eye on Aflac’s share price; if it does happen to drop into that range, I will re-evaluate the company.
I also examined a direct competitor to PartnerRe, RenaissanceRe (NYSE: RNR). It stacks up as follows: a current yield of 2.8% and the company has been paying and raising dividends for 16 years. Its 5-year average DGR is a low 4.4%, and its 5-year estimated EGR is 9.5%. The company sports a low PE of 6.8, a dividend payout ratio of 9%, and has a twelve-month total return of 12.9%.
RenaissanceRe would not make my portfolio because of its low yield and DGR. Although it does seem that, with a mere 9% payout ratio, the company could safely raise its dividend fairly substantially.
PartnerRe has many strengths, in its net income growth, reasonable growth, solid financial position with reasonable debt levels, excellent stock price performance, and very attractive valuation. That's why PartnerRe is now the second stock in my new dividend model portfolio.
I will begin tracking it based on the closing price on the day that this article is syndicated.
khern0203 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Aflac. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!