Travelers Companies Inc (NYSE:TRV) stock surged after beating estimates. The New York-based property casualty insurance company beat on both revenue and earnings. The recovery serves as a welcome relief as 2017 saw an unusually high number of claims due in large part to an active hurricane season. Now, as the company puts 2017 behind it, investors need to determine whether TRV stock becomes a worthwhile investment or remains a slow-growth prospect that investors should ignore.
Revenue for the fourth quarter of 2017 came in at $6.42 billion. That number represents a 5.9% year-over-year increase from the fourth quarter of 2016. Its core income came in at $2.28-per-share. The company earned $3.20 in the same quarter in 2016. Payouts related to the storms explain the drop off in earnings. Still, consensus estimates stood at $1.51-per-share for Q4 2017, so perhaps storm claims did not come in as high as expected.
The beat on both earnings and revenue provides some relief to owners of TRV stock. Revenue and profit growth have been abysmal for this Dow 30 component. This lack of growth continues despite its status as the second largest writer of property casualty insurance and third largest writer of personal insurance.
Over the last five years, annual revenue growth has averaged 1.6%-per-year. Profits levels have seen little movement since 2013. Average profit growth grew by only 0.25%-per-year in the same period. Still, this factors in 2017, when the company faced unusually high claims.
TRV Stock Saw Little Impact
But the amazing part of these numbers is the lack of effect on the stock. The high claims caused a temporary drop in earnings of around 40%. Frequently, investors will run for the exits at the sign of such a decline. However, TRV stock reacted by getting caught up in the general growth trend in stock. The stock increased in value by about 20% in the last 12 months. While this figure lagged the 32% overall increase in the Dow, it hardly represented a correction.
Also, insurance investors know that claim-heavy years will occur from time-to-time. Unfortunately for prospective buyers, no buying opportunity resulted from the heavy claim volume in 2017.
And despite the modest profit growth, the stock has roughly quadrupled in value since hitting a low of $35-per-share in 2009. Today it trades in the $140-per-share range. The stock currently trades at a forward price-to-earnings (P/E) ratio of 13. On average, property insurance stocks trade at a forward P/E of about 18. Competitors American Financial Group Inc (NYSE:AFG) and Allstate Corp (NYSE:ALL) trade near the same P/E. Still, they compare poorly regarding dividend yield.
Like the stock, dividend increases remained less affected. TRV increased the dividend despite the increased payouts. Today, the dividend stands at $2.88. This represents an increase of only 5-cents-per-year, the smallest increase since 2009. Still, it remains an increase. Even though a dividend yield of just over 2% is unlikely to impress investors, it has risen every year since 2006. It has also increased all but four years since its introduction in 1987.
So Should Investors Buy TRV Stock?
The question concerning these numbers is where does that leave investors of TRV stock? If one has to invest in a property casualty insurer, they should choose TRV.
Last year was a costly year for the company. Still, other than a smaller-than-usual dividend increase, investors felt little effect. They ignored both the small dividend increase and the high claims as TRV stock price surged 20% over the last year.
While TRV remained steady and increased its dividend, the stock has done little to impress. Travelers remains a solid company mired in a lackluster industry. While I don’t see investors losing money in this stock, I see only slower than average growth by buying. Investors can receive this level of growth and take much less risk in a Dow 30 ETF such as the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA).
If one needs an investment in this industry, Travelers stock remains the choice. However, given the slow growth, the bigger question should be, “why invest in this industry in the first place?”
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks.
