Travelers (TRV): A Great Business with a Great Dividend

Travelers (TRV) has a long history in the insurance business. The company has grown net income 22% annually over the past five years, with dividends increasing along the way. What does the future hold?

A look at the insurance sector often provides steady, high dividend and cash flush stocks with which to work. Large insurance companies by definition pay out high dividends because of their regulated inability to pursue high return and potentially higher risk investments. The insurance industry is a great place to look because insurance companies generate “float” that they keep, in the form of premiums, and may or may not have to pay out claims on that money. As such the company gets money very cheaply to invest. Hence the correct pricing of risk is essential.
The Travelers Companies (TRV) is principally engaged in providing a range of commercial, personal property and casualty insurance products and services to businesses, government units, associations and individuals. The Business Insurance segment offers an array of property and casualty insurance and insurance-related services to its clients primarily in the United States. The Financial, Professional & International Insurance segment includes surety and financial liability coverage, which primarily uses credit-based underwriting processes, as well as property and casualty products that are primarily marketed on a domestic basis in the United Kingdom, Canada and the Republic of Ireland, and on an international basis, through Lloyd's.
Travelers (TRV) is the third-largest writer of commercial U.S. property/casualty insurance, the second-largest writer of U.S. personal insurance through independent agents, and has total assets of approximately $110 billion. Shareholders’ equity comes in at $27 billion and total revenue was $25 billion, as of December 31, 2009. The company is number 99 on the Fortune 500 list of largest U.S. Companies and has approximately 30,000 employees.
At the current stock price of $49.60 the company is yielding 2.83% in dividends. The latest quarterly dividend totaled $0.36 which was 9% higher than the previous quarter. The company is also trading at below book value, which indicates either the value of net assets (assets minus liabilities) is realizable for a lower price in the market than that carried on the books. If this is not the case, however (and this is subject to a lot of interpretation), then the Travelers (TRV) brand name is effectively free.
In terms of valuations Travelers (TRV) is on a price to cash flow of 5.5 times and a PE ratio of 7.68 (as compared to an industry average of 38 times). The price to sales ratio at 0.99 times is 50% lower than peers. In 2009 the company produced a return on equity of 13% and has a debt level which is well within industry standards. Revenue has stayed largely flat over five years at $25 billion annually, bit this hasn’t stopped net income from rising 123% over the same time period, or 22% compounded annually. Dividends over that time frame have increased a total of 35%, from $0.92 in 2005 to $1.23 in 2009 (paid quarterly). Additionally, this company is in the minority as most others in this industry do not pay a dividend.
Regardless dividend seeking investors are looking for strong franchise businesses that have a long history of paying dividends, which are conservatively financed and generate excess cash flows on top of what is required to fund the business. In this regard Travelers is a great example.
Travelers (TRV) exhibits considerable financial strength ($108 billion in assets against $82 billion in liabilities), superior depth and breadth of product offerings (the company competes in almost all sectors of the insurance business in the US) and industry leading technology platforms. Travelers (TRV) is also a well-recognized brand name in the personal and commercial insurance marketplace and it has a very strong distribution presence with broad geographic presence across the U.S. Given those characteristics, anybody who has studied basic business economics knows that Travelers (TRV) is very good business.
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