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Nathan Parsh
Nathan Parsh
Articles (155) 

Travelers: An Excellent 'Boring Stock' Trading Below Intrinsic Value

Boring stocks are often undervalued, recession-proof and pay a solid dividend; Travelers fits the bill

October 19, 2020 | About:

While some investors prefer the exciting stocks that get discussed daily on financial channels, dividend growth investors tend to prefer "boring" stocks. These are the names rarely discussed or seen as growth stocks. These types of companies tend to provide an essential service that sees solid gains in most years. Boring companies tend to pay solid dividends, provide annual raises and remain fairly recession proof.

Insurance companies are one of my favorite boring industries as these companies tend to hold up better during a recession. Customers need to carry insurance even when economic conditions are deteriorating. Protection for autos, home and life might even be more important during these times. One of my favorite boring insurance stocks is The Travelers Companies, Inc (NYSE:TRV).

Company background and historical performance

Travelers has been in business for more than 150 years. In that time, the company has gone from a provider of just life and accident insurance to offering coverage for home, vehicles and businesses. The company is also a member of the Dow Jones Industrial Average.

Travelers generated more than $28 billion in revenue in 2019 and has a market capitalization of almost $29 billion.

Insurance tends to be a pretty sticky business. Consumers need coverage for their homes, cars and businesses. As one of the largest and most well-known companies in the industry, Travelers has a size and scale that is unmatched by most competitors. Revenues have bounced around over the years, but has the trend has been gradually higher.

Earnings per share have increased with a compound annual growth rate of 4.3% from 2010 to 2019. Digging deeper, we see net profit for 2019 was little changed from 2010. Boosting EPS results was Travelers' repurchase of almost 180 million shares during this period of time.

Where Travelers stands out is in its book value per share, which grew with a CAGR of almost 6% over the last 10 years. Book value stood at $106.42 as of the company's second quarter, 4.8% higher than the end of 2019.

The company's profitability rank is solid. Travelers receives a 7 out 10 on its profitability rank from the GuruFocus system, led by a three-year revenue growth rate of 8.2% that is better than 57% of the companies in the insurance industry. The company also scores well on return on equity and return on assets, though these figures are near the low end of the company's own performance over the last 10 years.

EPS growth ranks lower than almost two thirds of companies in the insurance industry. As an insurance company, Travelers' EPS performance can be marred by catastrophes such as fires, hurricanes, earth quakes and other natural disasters.

Travelers has a decent profitability score as the company grades out better than many of its peers on a number of categories. Travelers' biggest concern is always natural disasters, which can occur at any time. Since customers tend to maintain insurance coverage even during a recession, the company can be considered defensive in nature.

Dividend analysis

Shareholders of Travelers have been rewarded with a dividend increase for the past 16 years. According to The Dividend Investing Resource Center, which maintains a database of companies that have at least five consecutive years of dividend growth, Travelers' dividend has increased by an average of:

  • 7.2% over the past three years.
  • 8.5% over the past five years.
  • 10.1% over the past 10 years.

Dividend growth over the above periods of time have slowed slightly, but investors have seen at least high single-digit dividend raises in most years.

That changed for the most recent increase. Travelers raised its dividend by 3.7% for the distribution made this past March 31. The company is given mixed reviews for its dividend and buy backs from the GuruFocus system.

The current yield is lower than 63% of its peers, but slightly above the stock's median yield over the last decade. On the other hand, the dividend payout ratio and three-year average share buyback ratio are well above competitors in the insurance industry.

Shares of Travelers have averaged a dividend yield of 2.5% since 2010. The stock hasn't yielded 2.9% for an entire year since at least 2004. This means the stock's current yield 3% is rarely seen, which could hint that Travelers is undervalued.

As you can see above, Travelers' growing dividends have been more than covered by both EPS and free cash flow per share dating back before the last recession. You'd have to go back to the dot.com recession of the early 2000s to find a time where EPS and free cash flow weren't enough to cover the dividend payments, but this lasted only a short time. This lends more evidence to my belief that Travelers can be considered fairly recession proof.

Let's look at dividend coverage over the recent term. Travelers has distributed $3.34 of dividends per share over the last four quarters while producing $7.17 of EPS for a payout ratio of 47%. This compares unfavorably to the 10-year average payout ratio of 29%. This payout ratio was negatively impacted by second quarter results, which included much higher than usual catastrophe losses.

Where Travelers really shines is in its free cash flow payout ratio. The company has distributed $851 million of dividends over the last four quarters with generating $5.7 billion of free cash flow for a payout ratio of just 15%. This is lower than the average free cash flow payout ratio of 18% that the company saw from 2016 through 2019.

While the EPS payout ratio over the last year is higher than usual, it is still less than 50%, and that includes one quarter where EPS was considerably lower due to higher insurance claims. The free cash flow ratio shows that the company's dividend is very safe and likely to be increased for years to come.

Recession performance

Listed below are Travelers' EPS results for the years before, during and after the last recession:

  • 2006 EPS: $5.88
  • 2007 EPS: $6.72 (14.3% increase)
  • 2008 EPS: $5.24 (22% decrease)
  • 2009 EPS: $6.32 (21% increase)
  • 2010 EPS: $6.31 (0.2% decrease)
  • 2011 EPS: $3.25 (48% decrease)

Although EPS did decline double-digits in 2008, Travelers' EPS fell just 6% overall from 2007 through 2009. EPS results bounced around somewhat in the years following the recession, but the company held up fairly well in the Great Recession, showing that its products and services remained in demand among customers during this time.

At the same time, Travelers' dividend continued to grow. Listed below are the company's dividends paid before, during and after the last recession:

  • 2006 dividends: $1.01
  • 2007 dividends: $1.13 (12% increase)
  • 2008 dividends: $1.19 (5% increase)
  • 2009 dividends: $1.26 (6% increase)
  • 2010 dividends: $1.44 (14% increase)
  • 2011 dividends: $1.64 (14% increase)

Dividend growth was halved during the worst of the Great Recession, but quickly returned to double-digits in the ensuing years. High rates of dividend growth would continue for several years afterwards.

Debt

Travelers receives a middle of the road score on financial strength from the GuruFocus system. The company receives a 5 out of 10 in this area. This is largely due to the Travelers' very low cash-to-debt ratio, though this is just below the median figure for the company over the last 10 years. On the plus side, Travelers' equity-to-asset and debt-to-equity ratios are better than half of the company's peers. These scores also compare very favorably to the company's 10-year historical average.

Helping matters is that Travelers has a very strong debt-to-capital ratio. With long-term debt of just over $7 billion, the company's debt-to-capital ratio was just 20.7% as of the end of the second quarter.

Travelers' interest expenses totaled just $336 million over the last four quarters, giving the company a weighted average interest rate of 4.8%. The company's free cash flow produced over the last year more than covers its financing obligations. Debt likely won't be a headwind to the company's dividend safety and growth.

Valuation

Travelers closed Friday's trading session at $113.32. Yahoo Finance lists consensus EPS estimates at $8.58 for 2020, giving the stock a forward price-earnings ratio of 13.2. This is above the 10-year average price-earnings ratio of 12.1, but more in-line with the five-year average price-earnings ratio of 13.5.

The GuruFocus Value chart rates the stock as "modestly undervalued."

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If you're not familiar with the GF Value chart, it represents an estimate of the current intrinsic value of a stock based on a variety of factors, including traditional valuation ratios, the company's past returns and analyst estimates of future business performance.

As of Friday, the GF Value for Travelers is $148.21. This gives the stock a price-GF-Value of 0.76 and a rating of modestly undervalued. If the stock were to trade in line with the GF Value, then shareholders of Travelers would enjoy a gain of almost 31% from the most recent closing price - and that's before adding in the stock's dividend yield, which would be 2.3% at this price.

Final thoughts

Travelers offers customers something that they cannot do without: insurance coverage for themselves, their families, vehicles and businesses. The need for insurance is largely the same despite the economic conditions. Travelers is materially impacted by disasters, but this is the same for any company in this industry.

Travelers currently offers a dividend yield that is above the long-term average. The company's current payout ratio is well supported by EPS and free cash flow. Travelers' debt is also manageable.

Best of all, Travelers appears to be trading below its intrinsic value. Reaching this price would mean a 33% total return for the stock - not bad for a boring stock.

Author disclosure: the author has no position in any stocks mentioned in this article.

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About the author:

Nathan Parsh
I am originally from Detroit, Michigan, before moving to Maryland to begin a career as an educator. This is my 14th year teaching. My wife and I have two young children who keep us on our toes.

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