Linked here is a detailed quantitative analysis of Mercury General Corp. (NYSE:MCY). Below are some highlights from the above linked analysis:
Company Description: Mercury General Corp. is an insurance holding company, operating primarily in California, writes a full line of automobile coverage for all classifications of risk.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value (see page 2 of the linked PDF for a detailed description):
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
MCY is trading at a discount to only 4.) above. The stock is trading at a 5.5% premium to its calculated fair value of $38.88. MCY did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics (see page 2 of the linked PDF for a detailed description):
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
MCY earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. MCY earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1986 and has increased its dividend payments for 25 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section (see page 2 of the linked PDF for a detailed description):
1. NPV MMA Diff.
2. Years to > MMA
MCY earned a Star in this section for its NPV MMA Diff. of the $1,216. The stock's current yield of 5.95% exceeds the 3.1% estimated 20-year average MMA rate.
Memberships and Peers: MCY is a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: The White Mountains Insurance Group (NYSE:WTM) with a 0.2% yield, Erie Indemnity (NASDAQ:ERIE) with a 3.1% yield and Hanover Insurance Group (NYSE:THG) with a 3.1% yield.
Conclusion: MCY did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks MCY as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $44.31 before MCY's NPV MMA Differential increased to the $1,000 minimum that I look for in a stock with 25 years of consecutive dividend increases. At that price the stock would yield 5.5%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,000 NPV MMA Differential, the calculated rate is 0.4%. This dividend growth rate is below than the 1.2% used in this analysis, thus providing a margin of safety. MCY has a risk rating of 1.75 which classifies it as a medium-risk stock.
With a focus on automobile policies, MCY serves it customers well in its home state of California. Its customers have responded as demonstrated in the company's retention rate, which is routinely in excess of 90%. With a free cash flow payout of 92%, the company does not qualify for inclusion in my Dividend Growth Portfolio. However, I hold a small position in my High-Yield (and High-risk) portfolio. I will consider adding to this position when the stock is trading at or below my calculated fair value of $38.88, and as my allocation allows.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in MCY (4.3% of my High-Yield Portfolio). See a list of all my dividend growth holdings here.
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