The Chubb Corporation Dividend – Slowing Or Growing?

By Chad Henage - June 25, 2012 | Tickers: CNA, CB, TRV | 0 Comments

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The dividend aristocrat list has gotten smaller in the last few years. With the volatility in the stock and bond markets, it's somewhat surprising to see that The Chubb Corporation (NYSE: CB) is still on the list. Companies in the insurance industry have been hit hard on concerns that they will suffer losses on their investments from all the instability. Let's look at Chubb and see not only how the company is valued, but also if this dividend aristocrat will be able to stay in the club.

The property and casualty industry is not without competition. In fact, you could argue that the volatility of the last few years has shaken out some of the weaker players in the insurance field. The companies that have survived should in theory benefit from less competition going forward. Though Chubb is a dividend aristocrat, I'm always interested in how the market values companies in the same industry. Chubb counts companies such as CNA Financial (NYSE: CNA) and The Travelers Companies (NYSE: TRV) as its competition. Let's look at these three side-by-side to get an idea if there is an opportunity in Chubb stock:

You can see that there is still a lot of uncertainty surrounding the insurance industry. None of the companies sports the growth rate that they might if some of the uncertainty was removed from the financial markets. Chubb appears positioned right in the middle of its two competitors. The company has a better growth rate and dividend than CNA, but Travelers has the best combination of those two metrics. When you look at free cash flow, Chubb leads the pack and is the most efficient at using its assets to produce cash flow. It seems that Chubb is neither undervalued nor overvalued. Knowing the shares seem to be fairly valued, there is a problem I've noticed with the company's cash flow trajectory.

Looking at the last three years, Chubb's operating cash flow tells a scary story. The company's operating cash flow has decreased by over 22% in just the last three years. Since the company has been raising its dividend each year this has caused the free cash flow payout ratio to rise from 25% to over 33%. While this is still a very low payout ratio, the trend is a problem. If you don't believe it's a problem, look at what's happened to the company's dividend growth. Chubb management is sending a message in these numbers.

There is a clear deceleration in dividend growth. In fact, for the last seven years in a row the rate of increase has dropped each year. So what's next for Chubb and its dividend? 

Analysts expect earnings growth of nearly 9% going forward. This is actually good news for Chubb investors if this comes to fruition. In the last three years, net income dropped 23% while operating cash flow dropped by 22%. If this ratio holds then when earnings turn upward it only makes sense that operating cash flow would turn up just slightly less. If EPS grows by 9% I would expect cash flow to grow by 7-8%. Given the company's already low payout ratio, I would think the company would increase the dividend by just less than cash flow growth to keep the payout ratio very low. Given these expectations, investors should expect in the 5-7% range of dividend increases going forward. If some of the uncertainty in the global economy begins to dissipate, Chubb may beat earnings which in turn would lead to better dividend growth as well. Chubb isn't the most exciting stock, but it seems fairly valued, and investors would do well to considering adding some insurance to their portfolio.

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