Low capital businesses can be great generators of wealth over time. This is by no means an accident, as having lower overhead without capital equipment allows for more returns for shareholders.
This brings me to Cincinnati Financial (CINF), which has a strong track record of investor returns and also belongs to the rarefied Dividend Kings club. I highlight recent financial results and if it’s a buy, hold or sell right now, then let’s get started.
CINF: a king of dividends to help you sleep well at night
Cincinnati Financial Corp. is primarily a commercial, home and auto insurer through the Cincinnati Insurance Company. It operates out of Fairfield, Ohio and has been around since 1950. Beyond its core business, it also offers life insurance and annuity products through its subsidiaries.
Notably, CINF is a dividend king after paying an increasing dividend for 61 consecutive years. It has also generated strong returns for shareholders. As shown below, while below the S&P 500 (SPY) total return of 306%, it has still produced a respectable return of 248% for its investors over the past decade.
CINF continues to impress with strong fourth quarter results, with adjusted EPS growing 22% year-over-year to $1.97. Also encouraging, CINF’s book value increased 22% year-on-year to $81.72 at the end of December. These robust results were partly explained by a favorable P&C combined ratio of 84.2% (calculated as incurred losses and expenses divided by total premiums), down 310 basis points from 87.3% at the period of the previous year.
Additionally, CINF saw an impressive 10% growth in net written premiums in Q4’21 due to price increases and premium growth initiatives. Its investment portfolio is also performing well, with pre-tax investment income up 8%, including 14% growth in equity portfolio dividends and 4% growth in interest income. For the full year of 2021, CINF posted 15% growth in the fair value of total investments, driven largely by stock market gains.
Of course, risk management is the name of the game for insurance companies, and CINF is no different. This includes the adverse tornadoes that ripped through the Midwest in December of last year. Management sees this as an opportunity to shine, as noted in its recent earnings release:
While no one likes to witness the pain and destruction these events bring, that’s when our claims representatives in the field shine, offering support to our policyholders and agents with empathy and warmth.
When disasters strike, we must have the financial strength to respond quickly and fairly. This desire to be ready to serve those who need us has driven our multi-faceted approach to refining our pricing accuracy, including increasing loss control reviews, improving price segmentation and adding third-party data sources, improving financial strength over time.
We believe these long-term initiatives are on track as our combined ratio for the full year 2021 improved by 9.8 points to 88.3% compared to the end of 2020.
Additionally, CINF is positioned to benefit from inflationary trends, as this equates to higher net premiums. This was highlighted by management during the Q&A session of the recent conference call:
Personal lines management has just done a great job of resolving issues, whether it’s state, combination change, underwriting change, introduction of new models, new pricing tiers. And again, the shift to higher net worth, and that’s where we get a lot of the new business.
When you look at what we’ve disclosed in terms of rate changes, that’s going to be more on the renewal book. So to the extent that we have great new business growth and what we think is a profitable segment. It is truly the accumulation of hard, detailed work over a number of years by personalized leadership.
Meanwhile, CINF maintains strong margins relative to the industry. CINF earns an A- rating for profitability, with an EBITDA margin and return on equity of 36.5% and 23%, respectively, as shown below.
Meanwhile, CINF maintains a BBB+-rated balance sheet, with $25.8 billion in consolidated cash and invested assets at the end of 2021, up 15% from previous years. This includes a $13 billion bond portfolio with an average rating of A3/A by Moody’s and S&P, and an $11.3 billion equity portfolio, which saw its fair value grow by 14% in 2021.
While CINF’s 2.2% dividend yield is not high, it comes with a low payout ratio of 43% (based on adjusted EPS of $6.41 in 2021) and 61 years of consecutive annual growth, thus making CINF a king of dividends.
Admittedly, CINF is not cheap at the current price of $128 with a forward PE of 23.7, slightly above its normal PE of 22.3 over the past decade. As such, I would wait for a pullback below $120 before opening a position. Analysts on the sell side, however, have a consensus buy rating with an average price target of $136.
Key takeaway for investors
Cincinnati Financial has a strong track record of shareholder return and is operating at full steam, with growth in net premiums and investment value. It has a long history of resilience to contingencies and overall activity is quite resilient to inflation.
Looking ahead, CINF is well positioned to continue growing the business while maintaining its Dividend King status. However, it appears the market is also appreciating the value of CINF and as such I classify the stock as held based on valuation.