Dividend Aristocrats Part 20 Of 52: Cincinnati Financial (CINF) by Ben Reynolds, Sure Dividend

Cincinnati Financial (CINF) is one of just 17 publicly traded businesses to have increased its dividend payments for over 50 consecutive years in a row.  Click here to see all 50+ year dividend stocks.

In total, Cincinnati Financial has paid increasing dividends for 54 consecutive years.  The company was founded in 1950, and currently has a market cap of $9.9 billion.

The company operates under four insurance lines:

  • Life
  • Personal
  • Commercial
  • Excess & Surplus

Cincinnati Financial’s performance since 1987 has been impressive.  The company’s performance relative to the S&P 500 since 1987 is shown below:

Cincinnati Financial

Source:  Cincinnati Financial 2015 Shareholder Meeting, slide 27

Cincinnati Financial’s strategy to grow shareholder wealth is different than the previous 2 Dividend Aristocrat insurers I’ve analyzed [Chubb (CB) and Aflac (AFL)].

Chubb & Aflac seek to maintain low combined ratios (highly profitable insurance policies).  They use the significant cash flows from their operations to repurchase shares.  They also both maintain very conservative (mostly debt securities) investment portfolios.

Cincinnati Financial has a different strategy.  The company’s goal is to maintain a combined ratio between 95% and 100%.  This means it looks to write barely profitable – or even break-even – insurance policies.  The company looks to provide returns for investors through growing the size of its operations and paying sizeable dividends, rather than spend the bulk of cash flows on share repurchases.

Over the last 3 years, Cincinnati Financial’s payout ratio has averaged around 60%.  The stock currently has a 3.0% dividend yield, which is very high for the insurance industry.

Over 30% of Cincinnati Financial’s investment portfolio is invested in dividend growth stocks.  Over the long-run, Cincinnati Financial’s investment portfolio will realize greater growth than its more risk-averse rivals.  The company’s approach to investing its insurance float is more comparable to Berkshire Hathaway (BRK.A), rather than its Dividend Aristocrat insurance peers.

Competitive Advantage

Cincinnati Financial’s long dividend history is strong evidence of a durable competitive advantage.  On closer inspection, Cincinnati Financial only has a weak competitive advantage relative to its peers.

The company’s long-standing relationship with independent insurance agents make up its competitive advantage.  Cincinnati Financial becomes a preferred recommendation for independent agents as they become familiar with the company.  The image below shows how Cincinnati Financial’s market share by agency grows through time as agents become more familiar with the company.

Cincinnati Financial

Source:  Cincinnati Financial September 2015 Investor Handout

The company’s phenomenal growth over the last 50+ years is more a factor of the company operating in a slow changing industry.  The insurance industry is one of (if not the most) slowest changing industries.  This gives companies that right break-even or profitable insurance policies safety and longevity that businesses in other industries do not enjoy.

In addition, Cincinnati Financial’s more aggressive investment policy helps the company to compound shareholder wealth through time.  Cincinnati Financial is a dividend growth stock that uses its investment float to invest in other dividend growth stocks.

Growth Prospects

Cincinnati Financial has realized solid growth since 2011.  From 2011 through 2014, the company has compounded premium revenue at 11.9% a year.  Better yet, the company’s combined ratio was under 100% in fiscal 2013 and 2014; this was profitable growth.

The company has revitalized its growth after virtually no premium growth from 2005 through 2011.  While the insurance industry is stable, it is also very competitive.  Cincinnati Financial’s growth has not been steady.  Rather, it has been off-and-on over the last decade due to the competitiveness of the industry.

Cincinnati Financial has 2 growth initiatives to continue propelling growth forward:

Cincinnati Financial’s management has decided to focus on opportunities in the property and casualty reinsurance market.  To this end, the company has added several new high level management members to spearhead the initiative.  Reinsurance currently makes up a small portion of Cincinnati Financial’s revenue, but should see solid growth over the next several years.

The Capstone initiative provides customer insurance plans.  Cincinnati Financial describes its Capstone program as follows:

“The Executive Capstone program offers coverage features, limits and options to help agents tailor insurance programs for the more complex insurance needs of clients with homes valued up to $50 million, yachts, high-end cars or collector cars and personal articles to include fine arts and jewelry. Additional options include green coverage, employment practices liability endorsement for umbrella liability, excess flood when primary plans are purchased and family shield recovery expenses.”

The Capstone program will likely not provide a significant boost to the company’s total premium revenue.  It will likely be highly profitable as custom insurance policies for unusual situations tend to have more beneficial pricing for insurers.

Cincinnati Financial has significant organic growth potential.  The image below shows that the company has not even come close to full expansion in the United States, despite its long operating history.

Cincinnati Financial

Source:  Cincinnati Financial September 2015 Investor Handout

Recession Performance

Cincinnati Financial’s large exposure to equities causes it to suffer worse losses to book value during recessions than less aggressive insurers.  High quality dividend growth stocks tend to avoid cutting dividends, even during recessions.  As a result, the company’s investment income did not fall precipitously during the Great Recession of 2007 to 2009.

Premium income is another matter.  The Great Recession of 2007 to 2009 significantly impacted Cincinnati Financial’s core insurance business.  The company realized steep underwriting losses in 2008, 2009, 2010, 2011, and 2012.  As a result, Cincinnati Financial is not a recession resistant business.

Final Thoughts

Cincinnati Financial’s large fluctuations in its combined ratio show the company has not been disciplined enough in the past with its insurance business.

On the other hand, the company’s investment methodology is very beneficial; this is the real growth engine of the company

Cincinnati Financial does not rank very highly using The 8 Rules of Dividend Investing.  The company has a poor growth rate over the last decade (though growth has improved in recent years).  Additionally the company has shown it does not stand up well to recessions.  The company’s stock is also fairly pricey for an insurer; it is currently trading for a price-to-earnings ratio of 15.5.  Compare this to fellow Dividend Aristocrat insurer Aflac’s price-to-earnings ratio of just 10.8.