How Do Major P&C Insurance Companies Compare On Dividends?

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After the United Kingdom voted to leave the European Union in June, Europe and much of the world is facing significant economic uncertainty. This has led some investors to increasingly shift to relatively safer instruments such as government bonds in developed countries, which is causing bond prices to rise and yields to decline. Post-Brexit, the yield on the 10-year U.S. treasury note fell below 1.5% for the first time since 2012 and is now at just over 1.5%. This is leading to a global hunt for yield, and demands from investors that companies return a higher share of their earnings to shareholders in the form of dividends or share buybacks. To put things in perspective, the S&P 500 has risen by close to 29% in the last 3 years whereas the Dividend Aristocrats index, which includes those S&P 500 companies that have paid dividends to shareholders for 25 consecutive years, rose by 36% in the same period.

In this note, we compare dividend payouts of three major U.S. property and casualty (P&C) insurance companies- American International Group (NYSE:AIG), The Travelers Companies (NYSE:TRV) and Hartford Financial (NYSE:HIG). To compare these three companies with respect to dividends, we will look at three important metrics:

  1. Dividend Yield: Ratio of dividends paid per share to price per share. Per this metric, Travelers has paid the highest dividend yield over the last three years and its median yield value over the last 13 years was 2.3%, compared to 1.7% paid by Prudential and 1.1% by AIG. Interestingly, Travelers’ dividend yield has been consistent around 2.1% while Hartford has consistently increased it from 1.3% in 2013 to 2.1% in the second quarter this year.trv-8
  2. Dividend Payout Ratio: Dividend payout ratio is the share of earnings that a company pays out as dividends. Companies have to strike a balance between paying out dividends to shareholders and reinvesting earnings to fund growth. Generally, a payout ratio below 60% is considered optimal but it may vary depending on the company’s growth cycle and maturity. In the case of P&C insurers, payout ratio was highest for AIG in 2015 but that was related to pressure by activist investors, including Carl Icahn. Excluding AIG, both Hartford and Travelers had a similar dividend payout in the last three years. In terms of median payout ratio over the last 13 years, Travelers was better at 24% compared to 21% for Hartford. For perspective, the S&P 500 payout ratio rose to 37.93% this month (calculated for trailing twelve months), which is near its highest levels of 38.16% reached in Feb 2009. This ratio was near 33% at the beginning of 2015 and 36% at the beginning of 2016. trv-9
  3. Dividend Growth Rate: Looking only at dividend yield (which can be high because of a depressed stock price) or payout ratio (which can be unsustainable if unusually high) can be misleading in terms of gauging a stock’s desirability as a dividend stock. In such a scenario, it is important to look at the company’s dividend over the last few years and how much it has grown or shrunk. In the case of major P&C insurers, Travelers has managed to increase its dividend consistently since 2005 and shows a CAGR of 10% over the last 3 years. On the other hand, Hartford managed to show continuous dividend increases since only 2012 but it reported an impressive CAGR of 25% over the last 3 years.trv-10

 

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Have more questions about P&C insurance companies? Please refer to our complete analysis for AIG TRV HIG

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