Updated October 5, 2022 by Quinn Mohammed

Cincinnati Financial ( CINF ) has a dividend track record few companies can match.

The company has increased its cash dividend for 61 consecutive years, making it one of only 13 stocks in the entire market with a dividend increase streak of at least 60 years.

That puts Cincinnati Financial among the elite Dividend Kings, a small group of stocks that have increased their payouts for at least 50 consecutive years.

You can see the full list all 45 dividend kings are here.

You can also download an Excel spreadsheet with the full list of dividend kings (plus important metrics like price-earnings ratios and dividend yields) by clicking the link below:

The dividend kings have the longest track record when it comes to rewarding shareholders with dividend increases.

Cincinnati Financial has a relatively “boring” business model. But insurance shares are among the best stocks for long-term dividend growth investors.

Cincinnati Financial’s dividend yield is 3.0%, well above the S&P 500’s ~1.7% average yield.

With a strong business model, good payout ratio and strong balance sheet, the insurer has plenty of room to raise its dividend for years to come.

And the stock appears to be a bit undervalued right now, which means investors interested in total return may see this as a buying opportunity.

Business overview

Cincinnati Financial is a property and casualty (P/C) insurance company founded in 1950.

It offers business, home, auto and financial products including life insurance, annuity, property and casualty insurance. It is headquartered in Ohio and has a market capitalization of $14.5 billion.

The company operates in 46 states. The company also has more than 1,945 agencies with 2,786 locations as of June 30thousand2022 year.

Source: Presentation for the investor

As an insurance company, Cincinnati Financial makes money in two ways.

First, he earns a profit from the insurance premiums of the policies he sells to his customers.

Second, he also earns investment income by investing his turnover, that is, the money he receives from his customers less the amount he pays out in claims.

This is why the insurance business can be so profitable – policyholders generate large amounts of melt that can be invested at a high rate of return, thus generating compound returns.

On the other hand, the insurance business can be particularly challenging for investors.

Some insurers are often tempted to lower the premiums they charge to attract more customers and thus increase their market share. In good years, when catastrophic losses are low, these insurers will post high levels of profits.

However, a year with a large catastrophic loss will inevitably occur at some point and wipe out the profits of all previous years if insurers have not followed sound underwriting policies.

This means that investors should evaluate P/C insurers based on their long-term performance.

Cincinnati Financial is better than average in this regard compared to peers.

Over the past five years, the company has posted a combined ratio 6.5 percentage points better (lower) than peers.

Source: Presentation for the investor

The combined ratio is a key measure of the performance of P/C insurers as it is the ratio of the amount of claims paid to the amount of premiums received. As this definition shows, the lower the combined ratio, the better.

Cincinnati Financial has been able to maintain the highest combined ratio thanks to the predictive modeling and analytics tools it uses, as well as data management, to determine the probability of each catastrophic event and thereby set the appropriate price for each customer.

Cincinnati Financial’s superior underwriting policy is evident not only in its superior combined ratio, but also in its exceptional dividend growth.

Because catastrophic losses are highly variable in nature, they are incredibly high in some unfavorable years.

Therefore, it is almost impossible for most insurers to increase their dividends during these few difficult years.

Cincinnati Financial is a glaring exception to this rule, as it has increased its dividend for 61 consecutive years. This is a testament to his smart underwriting policy and long-term management perspective.

Another factor behind Cincinnati Financial’s exceptional dividend record is its healthy payout ratio, which the company has always focused on to create a wide margin of safety for its dividend.

Source: Presentation for the investor

With a good payout ratio and financial strength, the insurer can continue to grow its dividend for many years to come.

In 2022, the second quarter, revenues were down 64% year over year. However, earned premiums were up 11% year over year.

In the first six months of FY2022, total revenue was down 55% compared to the first six months of FY2021. Non-GAAP operating earnings per share fell 29% in the first six months to $2.23 per share.

The book value of the company decreased by 10% compared to the same period last year and amounted to $66.30.

Growth prospects

In this business, you should expect a rough year every few years. But investors should focus on the long-term outlook for P/C insurers, and we think Cincinnati Financial’s future growth prospects are intact.

We expect 6% annualized EPS growth over the next five years for Cincinnati Financial.

Management plans to achieve an average annual growth rate of 10% to 13% over the next five years. According to his definition, the growth rate is equal to the growth rate of book value per share plus dividends paid to shareholders.

It aims to achieve a growth rate of 10% to 13% over the next five years, mainly due to new agency appointments and premium growth at already appointed agencies.

As shown in the chart below, Cincinnati Financial has consistently increased its agency market share over time.

Source: Presentation for the investor

Its market share remains low for the first five years of each agency’s appointment, but then increases significantly and thus contributes to significant premium growth.

On the other hand, the company derives a significant portion of its revenue from investment returns and is therefore highly sensitive to prevailing interest rates and stock market activity.

Notably, Cincinnati Financial is a fairly aggressive investor with 42.4% of its investment portfolio invested in common stocks.

Notably, 28% of its stock portfolio is invested in technology shares. However, this is roughly in line with the S&P 500, which contains 27% of technology stocks. Cincinnati’s top holdings include Apple, Microsoft, UnitedHealth, AbbVie and Accenture.

However, this strategy leaves the company vulnerable to potential bear market.

Competitive advantage and recession outcomes

Cincinnati Financial boasts excellent relationships with most of its agents, which help the insurer gain access to its agents’ best accounts.

In addition, it has a good reputation for its financial stability and efficient claim payment procedures. These features provide a kind of competitive advantage.

On the other hand, this competitive advantage is narrow. P/C insurance is characterized by intense competition, which has become more intense than ever in recent years.

Warren Buffett has repeatedly stated that the best days for insurers are in the past due to the current intense competition.

Moreover, Cincinnati Financial is vulnerable to recessions because of its high exposure to the stock market and its sensitivity to interest rates.

During recessions, interest rates remain low and thus affect the yield on the insurer’s bond portfolio.

However, Cincinnati Financial’s ability to generate strong cash flow and maintain profitability even during recessions has allowed it to increase its dividend for six decades.

Valuation and expected return

We expect earnings per share for Cincinnati Financial to be $4.95 this year. As a result, the stock is trading at a forward price-to-earnings ratio of 18.8. This is below our fair value P/E of 20.0.

As a result, the stock appears to be slightly undervalued right now.

If the stock achieves a fair valuation over the next five years, it will benefit from a 1.2% annualized gain in earnings due to an increased earnings multiple.

We also expect 6.0% annual EPS growth over the next five years, and the stock also offers a 3.0% dividend yield.

The stock is likely to offer a 9.7% average annual return over the next five years.

Final thoughts

Cincinnati Financial is a premium P/C insurance company. The company’s exceptional dividend record, which has increased for 61 consecutive years, is a testament to its disciplined underwriting policy.

And the stock is somewhat undervalued right now, but not by much.

As a result, the stock makes for a strong holding, but isn’t attractive enough for a buy rating right now.

The following articles contain stocks with very long dividend or corporate histories that are ripe for picking for dividend growth investors:

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