by Lawrence Meyers | October 26, 2011 9:00 am
Today, we’re looking at Dow Jones Industrial Average component Travelers (NYSE:TRV). You might recall this was once its own company, until it was purchased by Citibank. That resulted in what is now known as Citigroup, which subsequently spun Travelers back out as its own entity.
Insurance is, generally, a great business. It’s all about proper underwriting, of course. And Travelers does it all. The Business Insurance segment offers property and casualty products in six subsets from small businesses to specialized products. The Financial, Professional & International Insurance segment provides property and casualty products, and surety and financial liability coverage, which uses a credit-based underwriting process. The Personal Insurance segment offers property and casualty insurance covering personal risks to individuals.
The driving factor regarding Travelers is, as stated, proper underwriting. If it misjudges risk, it could end up in trouble. However, being so diversified, Travelers would have to tolerate consistently poor risk management (such as an attempt to boost revenue) and encounter loss-generating bad luck to end up in a fix. Mind you, investors must also assume the company is not taking inordinate risks by playing in the areas, such as collateralized debt obligations, that American International Group did. There is also competition to consider, which is significant, but Travelers’ brand name gives it a leg up on many other insurance conglomerates.
Stock analysts looking out five years on Travelers see annualized earnings growth at 8.7%. At a stock price of $51, on FY 2011 earnings of $3.60, the stock presently trades at a P/E of 14. Hartford Financial Services Group (NYSE:HIG) and W.R. Berkley (NYSE:WRB) are Travelers’ closest competitors, with P/Es of 5 and 10, respectively, so Travelers is expensive by comparison.
A critical aspect of any insurance company’s financials is the storehouse of cash it retains in case many disasters strike at once or a huge one slams into a part of the world the company insures. Travelers has $5.3 billion of cash on hand, which should be sufficient. There is no capex in this business, so trailing 12-month cash flow was $2.9 billion, which is six times the amount of free cash flow necessary to pay its 3.2% dividend.
No insider purchases have been made in a long time, which is discouraging but not a deal-breaker.
If we put a 9 P/E on Travelers on projected 2015 earnings of $8.40 per share (factoring in 3.2% compounded dividend yield reinvested), we get a price target of $76. That’s a 50% increase over the current price. I think Travelers is worth serious consideration at these levels.
As of this writing, Lawrence Meyers did not own a position in any of the aforementioned stocks. Check out Meyers’ take on other Dow Jones stocks here.
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