The Travelers Companies (NYSE:TRV), a provider of a wide range of commercial and personal P&C insurance products, has lagged the market over the past six months, falling more than 13% compared to mid-single digit declines in the S&P 500 and DJIA. As of June 30, 2011, the company had more than $25 billion in equity, equal to a book value just shy of $60 per share; the stock, by comparison, has been fighting the $50 hurdle for the past month, and trades nearly 20% below book value.
On Tuesday, the stock moved around 3% higher (before giving gains back late in the day) on an upgrade by Goldman Sachs (GS) analyst Michael Nannizzi from sell to buy ($63 target). He noted, among other things, the company’s 3.3% dividend yield, which is roughly 140 basis points above the yield on 10-year Treasuries.
In the second quarter, the company reported that total after-tax catastrophe costs nearly $1.1 billion, due to the tornadoes and hail storms in the United States during April and May. While the disasters caused a short term stoppage in huge share buybacks, management made their long term intentions extremely clear: “On the premise that weather patterns return to more normal levels and our profitability returns to historical levels, and to the extent that the capital can be put back to work in our business for growth opportunities, we will continue buying back shares.”
Even with the temporary reduction in buybacks, management can still tout impressive numbers: Year-to-date repurchases total $1.3 billion of common stock, with a total trailing twelve month repurchase of $3.5 billion. Those two numbers have reduced diluted shares outstanding by 3.5% and 11.9%, respectively. Since the end of 2007, the number of shares outstanding has decreased by more than one-third.
For now, the company needs to pay claims, and buybacks are on hold. However, the important realization for long term shareholders is that the resulting 25% price decline from the low $60s in May is really just an opportunity. For one, it’s a chance to buy more shares in a company that has increased BVPS at a rate of 10.5% and 9.3% in the last five and ten years, respectively, for 20% below book. Secondly, management will be able to continue repurchasing shares (pending any increase) at bargain-bin prices, which will further compound strong business results in expansion of book value per share.
In the end, the short-term decline only sweetens the opportunity for long-term gain. For investors who can see past next quarter, shares of TRV may be worth a second look.
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, my preferred approach is "Patience followed by pretty aggressive conduct." I run a concentrated portfolio, with a handful of equities accounting for the majority of my portfolio (currently two). In the eyes of a businessman, I believe this is adequate diversification.