Dividend Investor Portfolio #12: Reinsuring Value
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Dear Investor,
Welcome to the 12th edition of TipRanks’ Dividend Investor Portfolio & Newsletter.
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Market-Moving News: June 10, 2024
Stocks closed slightly lower after a volatile session on Friday, as another batch of stronger-than-expected jobs data dented hopes for a Fed interest-rate decrease in September. Despite the daily loss, major stock benchmarks ended the week higher, thanks to an NVIDIA (NVDA)-led rally earlier in the week.
May’s nonfarm payroll growth strongly accelerated from April, marking the 41st consecutive month of increases, with the economy adding jobs at a rate well above pre-pandemic trends. Although the unemployment rate inched higher in May, it still marked the 30th straight month with rates at or below 4%, the longest such stretch in at least 50 years.
The apparent strength of the U.S. job market contradicts the downbeat economic reports received earlier last week, which included a downward revision of first-quarter GDP and data pointing to weakening consumption and manufacturing. While payroll data significantly lowered chances for an imminent monetary easing, some investors also took it as a sign of the diminishing possibility of stagflation – a low-growth, high-inflation economic environment.
Market participants are now awaiting the all-important CPI report, due on Wednesday – the same day that the Federal Reserve’s committee members gather for their policy meeting. While policymakers will certainly keep rates on hold for another month, investors will look for a possible change of tone or additional clues that might shed some light on the central bank’s further steps.
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This Week’s Quality Dividend Stock Idea
Everest Group Ltd. (EG) is a global insurance and reinsurance provider, serving customers in 115 countries across 6 continents through a wide network of subsidiaries and affiliates. It offers insurance coverage in areas such as casualty, energy, specialty, credit, and financial lines. EG is also one of the world’s largest reinsurers, offering property, casualty, marine, and aviation, surety, credit, and other types of reinsurances.
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One of the Global Reinsurance Leaders
Founded in 1973 as Prudential Reinsurance, a subsidiary of Prudential Financial, it was spun off in 1995, changing its name to “Everest Re” and completing an IPO on the New York Stock Exchange (NYSE). EG became part of the S&P 500 index in 2017.
Today, with a market cap of almost $17 billion and annual revenues of $14.5 billion, Everest is a global leader in risk management and the world’s fourth-largest property and casualty (P&C) reinsurer. The company’s Reinsurance segment is more than triple the size of the Insurance segment. However, the latter has been displaying a double-digit growth trajectory in recent quarters.
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Stellar Finances, Robust Performance
Everest boasts stellar financial health with zero net debt (i.e., it has more cash than its total liabilities). The company’s strong financial position is underscored by its high credit ratings (“A+“ at S&P Ratings and “A1” at Moody’s).
EG is a high-margin, highly profitable business. In fact, the company’s free cash flow and net profit margins are in the top 20% of its industry; so are its capital efficiency and profitability metrics, including ROE, ROA, and ROIC.
The company’s revenues have grown at a CAGR of 15% over the past five years, while its earnings-per-share have surged at a CAGR of 64%. In its latest quarterly report, Everest has shown significant increases in profitability across all key metrics, including record underwriting income, underwriting margin improvement, and strong net investment income generation. Net investment income rose to record heights, driven by a larger asset base and strong core fixed income returns.
In the Reinsurance segment, gross written premiums grew 20.4% year-over-year and underwriting profit increased by nearly 70%. The Insurance segment reported a ~10% increase in gross written premiums, driven by a diversified mix of property and specialty lines. Both segments reported a significant improvement in attritional loss ratios.
EG’s Q1 2024 net income almost doubled year-on-year, while its adjusted diluted EPS surged by over 44% to mark a fourth consecutive quarter of double- or triple-digit growth. Insurance and reinsurance income is normally highly volatile and depends on many factors, some of which are outside of the company’s control. That’s why this string of blockbuster EPS growth is an extremely positive sign.
Everest’s primary metric for measuring financial performance is Total Shareholder Return (TSR), defined as annual growth in book value per share (excluding unrealized gains and losses on available for sale fixed maturity investments), plus dividends per share. EG has declared that it targets a 2024-2026 three-year average TSR of over 17%. In this realm, the company seems to have started the program right on track, delivering an 18.1% TSR in the first quarter.
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Strong Dividend Growth Outlook
Everest Group has paid quarterly cash dividends since 1995, increasing them annually from 2013 to 2019. Dividend increases were put on hold during the COVID-19 pandemic and resumed in May 2022.
While EG’s current dividend yield of 1.91% is slightly below the Financial sector average of 2.1%, several factors suggest that this is slated to change. First, the company’s assumption of TSR as its primary performance metric speaks volumes about its alignment with shareholder interests. Second, EG’s extra low earnings- and cashflow-based payout ratios allow for significant dividend growth without limiting its financial flexibility. Third, given its balance sheet strength and robust profitability, analysts foresee many more years of dividend growth ahead.
In addition, before the COVID-19 crisis the company registered a dividend-per-share growth at a CAGR of ~10% and is now expected to return to similar DPS growth rates. Case in point, in May 2024 the payout was raised by 14.3%.
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Total Return in Focus
In addition to dividend payments, Everest Group rewards its shareholders through opportunistic buybacks, performed in accordance with financial results as well as the market share price. Thus, in Q1 2024 the company repurchased its shares for $56.1 million.
Despite Everest’s strong delivery and enviable finances, its stock has underperformed the S&P 500 over the past 12 months, delivering a modest gain of 12%. As a result of this underperformance, the stock is trading at very low valuations, carrying notable discounts to the Financial sector as well as the U.S. Insurance Industry. Furthermore, based on projected cash flows, Everest’s shares trade about 70% below the company’s fair value.
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Investing Takeaway
To conclude, we view Everest Group Ltd. as a winning combination of quality and value. Its stellar finances, outstanding earnings growth, solid execution of strategy, and bright outlook make it a valuable addition to long-term income portfolios.
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Dividend Investor Portfolio
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Portfolio News
¤ Automatic Data Processing (ADP): the company will go Ex-dividend on June 14th, with the payment date on July 1st.
¤ Qualcomm (QCOM): Bank of America Securities analysts have assigned a $245 price target to the stock, implying an upside of almost 19% over the coming 12 months, in addition to the stock’s 66% rally year-to-date. According to BofA, this potential upside is attributed to opportunities in ARM’s AI chip-equipped PCs and laptops, with AI-embedded mobile phones, as well as with other growth avenues.
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Recent Trades
None at the moment, although we are considering adding a stock to our portfolio when the market conditions allow for an attractive entry point. Stay tuned.
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Portfolio Attributes
| Dividend Portfolio Yield |
Dividend Growth Rate | Annual Dividend Income |
| 3.71% | 8.40% | $3,735.80 |
| Yield-on-Cost Adjusted |
Weighted Growth | Equal-Weight 100K Portfolio |
Current Portfolio
| Name | EX-Dividend Date | Payment Date | Dividend Yield | Annual DPS |
| Automatic Data Processing (ADP) | Jun 14, 2024 | Jul 01, 2024 | 2.18% | $5.60 |
| Allianz SE ADR (ALIZY) | May 08, 2025 | May 13, 2025 | 5.25% | $1.50 |
| Amgen (AMGN) | Aug 16, 2024 | Sep 06, 2024 | 3.23% | $9.00 |
| BlackRock (BLK) | Jun 07, 2024 | Jun 23, 2024 | 2.68% | $20.40 |
| Edison International (EIX) | Jul 01, 2024 | Jul 28, 2024 | 4.29% | $3.12 |
| JPMorgan Chase (JPM) | Jul 05, 2024 | Jul 31, 2024 | 2.20% | $4.60 |
| Kroger (KR) | May 14, 2024 | Jun 01, 2024 | 2.02% | $1.16 |
| LyondellBasell (LYB) | Jun 03, 2024 | Jun 10, 2024 | 5.07% | $5.36 |
| Philip Morris (PM) | Jun 22, 2024 | Jul 11, 2024 | 5.82% | $5.20 |
| Qualcomm (QCOM) | May 30, 2024 | Jun 20, 2024 | 2.03% | $3.40 |
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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
