Dividend Analysis - Chubb Corporation (NYSE:CB)
19 July 2007My next S&P 500 Dividend Aristocrat is The Chubb Corporation which trades on the NYSE under the symbol CB.
Company Profile:
From Yahoo Finance
The Chubb Corporation, through its subsidiaries, provides property and casualty insurance to businesses and individuals. The company operates through three segments: Commercial Insurance, Specialty Insurance, and Personal Insurance. The Commercial Insurance segment offers a range of commercial customer insurance products, including coverage for multiple perils, casualty, worker’s compensation, property, and marine. The Specialty Insurance segment provides various professional liability products for privately and publicly owned companies, financial institutions, professional firms, and healthcare organizations. This segment also involves in the surety business. The Personal Insurance segment offers products for individuals with homes and possessions. This segment primarily covers automobiles and homeowners. The company, through its subsidiary, Bellemead Development Corporation, also engages in commercial and residential development activities primarily in New Jersey and central Florida. The Chubb Corporation provides its products and services through independent insurance agents and brokers in the United States, Canada, Europe, Australia, parts of Latin America, and Asia.
Chubb Corporation has a market capitalization of $21.03B.
Company Fundamentals:
Just like my analysis on US Bancorp, I was not able to find very much data on Chubb’s return on invested capital. I was only able to gather the 5 year average ROIC of 10.8% and the 2006 ROIC of 15.48%. In cases like these, I use the return on equity as a proxy for management’s performance.
The 10 year average ROE was 10.91% and the 5 year ROE was 12.32%. There were 2 years (2001, 2002) where the ROE was below 4%. Now Chubb does not have excessive debt. Total debt is only about 19% of capital. So the ROIC and ROE should be quite close. However, I prefer companies that are able to maintain a minimum of 10% ROIC.
I can see that 2001 and 2002 were bad years and this is going to show up in our growth rates. And of course, the 5 year numbers are going to look much better than the 10 year numbers because of these 2 years.
For example, the equity growth rate has been 7.79% over the last 10 years. However, over the last 5 years, it has been 12.57% and has remained at this level until 2006.
And this trend is really dramatic in the earnings per share growth rate. Over the 10 year period, the EPS growth rate was 12.34%. However, over 5 years, it was an astronomical 82.7%! Now, it has come back down to Earth. The 3 year average is 34.43% and 34.45% in 2006.
This trend is not as pronounced in the sales growth rates. Over the whole period, the growth rate has been 10.96%. The 5 year number is 13.36%. Not as dramatic a difference. However, the 2006 sales growth rate was stagnant at negative 0.6%.
Definitely seems like two different companies. The last 5 years have been very good.
Dividend Fundamentals:
Chubb Corporation has a current dividend yield of 2.18%. This is fairly average. It is higher than the S&P 500 Index dividend yield of 1.89% and slightly lower than the DJIA at 2.26%.
Although Chubb Corporation has raised their dividends for the last 25 consecutive years, it has not been at an aggressive growth rate. Over the 10 years, the dividend growth rate has been 5.26%. Even the 5 year average is a mere 7.79%. However, the last 2 years have been much better at 10.26% and 16.28% respectively.
And Chubb Corporation’s dividend payout ratio has been steadily decreasing to a very low 16.64%.
There has been lots of cash to pay for these dividends as well as the cash flow growth rate has been extremely good. Over the 10 year period, it has been 11.28%. But, over 5 years, it has been 62.58%!
Valuation Models:
As you know, I use three different valuation models to determine a model price for stocks.
From a dividend yield perspective, I look at the average high dividend yield that the stock has paid. In this case, Chubb has paid an average high dividend yield of 2.62% over the last 5 years. By demanding this average high dividend yield, then the most I should be willing to pay for Chubb is $44.20. At the current price of $53.15, the stock is currently selling at a premium of 20.24%.
From Benjamin Graham, I calculate the Graham number to be $68.18. In this case, the model price shows a discount of 22%.
And lastly, I use the discounted present value method with the following inputs:
- future P/E of 8.67 (Chubb’s current P/E ratio is at a historical low)
- future EPS growth rate of 7.79% (Although the analysts have forecast 10% future EPS growth rate, my estimate comes from looking at the historical equity growth rate and using the more conservative growth rate)
- dividend yield of 2.62% (the average high dividend yield over the past 5 years)
- dividend growth rate of 7.79% (average growth rate over the last 5 years)
With these inputs, my model price works out to $38.81 which means a premium of 36.93% currently exists.
See my calculations.
The 1 year stock price charts looks as follows:
Conclusion:
This stock has definitely come on strong over the last 5 years. It has had decent equity growth rate and stunning EPS growth rate in that time frame. And the cash flow growth rate has been stellar.
With a very low dividend payout ratio and more aggressive dividend growth over the last 2 years, this stock has potential. I would definitely like to see that dividend growth continue in the future.
However, this stock seems to be priced too high for my taste. So I will take the easy road out on this one and pass.
What are your opinions on Chubb Corporation? Worth adding to our dividend portfolio?
Full disclosure: I do not own any shares of CB.
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