by Tom Taulli | July 19, 2012 12:47 pm
Thursday has been a pretty middling day for Dow Jones insurance titan Travelers Cos. (NYSE:TRV).
The company reported earnings of $1.26 per share — yes, well better than the 88 cents Travelers recorded in the year-ago period, but far from the $1.38 consensus estimate from Wall Street analysts. TRV shares flirted between gains and losses since the bell, but were down less than 1% in midday trading.
Still, Travelers has been a consistent winner for shareholders, averaging sizzling annual returns of more than 19% for the past three years.
So, should you buy Travelers and consider today just a bump in the road? Or is there reason for caution? To decide, here’s a look at the pros and cons:
Diversity: Travelers operates a massive business for property and casualty insurance, covering areas like commercial properties, homes and autos. The company has more than 13,000 independent agents in the U.S., U.K., Canada and Ireland. It also has a joint venture in Brazil.
Rewards Shareholders: Since 2006, Travelers has repurchased a whopping 49% of its outstanding shares. The dividend payout has also grown at an 11% annual rate, and currently sits near a 3% yield. These trends are likely to continue. In the second quarter, Travelers shelled out $350 million to buy back 5.6 million shares, and its dividend distribution came to $181 million.
Conservative Approach: During the 2008 financial crisis, Travelers was one of the few insurers that continued to grow. Management is fairly conservative, the company’s investments are focused on solid categories, and TRV has a strong risk-management system.
Catastrophe Losses: This is the wild card you deal with when you deal with insurance stocks. A mega event — earthquake, hurricane, terrorist attack … take your pick — can have a severely detrimental impact on Travelers. And the growing concerns about climate change actually could increase the probability of catastrophe losses. Consider that 2011 was the costliest period in U.S. history, as seen with tornadoes in Alabama and Missouri, wildfires in Texas and Hurricane Irene.
Market Returns: A key to Travelers’ success is getting strong returns on its massive investment portfolio. But the company has seen much lower returns over the past few years, such as seen with fixed-income securities. This has been an issue for all the major carriers like Hartford Financial (NYSE:HIG) and Chubb (NYSE:CB).
Asbestos Claims: Travelers continues to receive a substantial number of these from policyholders. Across the U.S., attorneys have been aggressively advertising to get people join class-action suits. Unfortunately, it is not easy to estimate the extent of the overall liability from these claims, so it could be a continuous drag.
Travelers is a prime example of a company that’s built to last. Its roots go back to 1853, so it clearly has been able to weather just about any adverse environment.
Going forward, investors should feel confident in Traveler’s ability to push forward and find ways to grow its business. Management also is likely to keep aggressively buying back its shares and improving the dividend.
So should you buy Travelers? Yes — the pros outweigh the cons on the stock, especially if you’re an investor looking for a conservative play.
Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of the upcoming book How to Create the Next Facebook: Seeing Your Startup Through, from Idea to IPO. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.
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