Dividend Analysis: Progressive Corporation (NYSE:PGR)
4 July 2007Our next S&P Dividend Aristocrat deals with insurance - Progressive Corporation which trades on the NYSE under the symbol PGR.
Company Profile:
From Yahoo Finance
The Progressive Corporation, through its subsidiaries, provides personal and commercial automobile insurance and other specialty property-casualty insurance products and related services in the United States.
This is a large cap company with a market capitalization of $17.60B.
Company Fundamentals:
I always like to start with a look at the return on invested capital. Unfortunately, I was not able to obtain much data. The 5 year average is 19.70% and last year’s ROIC was 20.51%.
However, PGR does not have much debt - only 14.6% of capital. So the return on equity numbers should pretty much be identical to the ROIC. The 10 year average ROE is 17.67%. The 5 year average is 23.39% and last year’s ROE in 2006 was 22.94%. These are all very strong, very healthy numbers. Management has been doing a very good job.
Equity growth rate has been strong over the last 10 years with a growth rate of 15.71%. Over 5 years, it swells to 20.03% and last year’s growth rate was 18.27%. Solid, consistent growth.
Earnings per share growth rate has been more volatile. In 2000, the EPS growth rate was negative 83%. And once again in 2005, PGR experienced negative 8.5% EPS growth rate. However, over the 10 year period, EPS growth rate was an incredible 28.78%. And over 5 years it was an even better 34.79%.
Sales growth rates have really tailed off in the last 2 years with growth rates of 3.80% and 3.38% respectively. This is much, much lower than the average 15.26% over the whole 10 years. This is definitely a concern.
Dividend Fundamentals:
For being a member of the S&P 500 Dividend Aristocrats, this is the LOWEST dividend yield I have ever seen! The current yield on PGR is 0.15%. How have they been able to raise their dividend for the last 25 consecutive years and still have a dividend yield of 0.15%??
The dividend growth rate has been nothing to write home about. Over the 10 year period, it is a mere 5.20%. Now that has improved in recent years. The 5 year average dividend growth rate is 7.20%. And last year’s growth rate was 6.67%. Still nothing overly impressive.
But, a good sign is that this absolutely rock bottom dividend yield is accompanied by a similarly rock bottom dividend payout ratio. In fact, the dividend payout ratio has been dropping over the 10 year period from 6.75% down to the current 1.52%.
And PGR has definitely earned the cash to pay for these dividends and more. PGR has had a very impressive cash flow growth rate of almost 26% over the last 10 years. So there is lots of cash available.
Valuation Models:
From the historical dividend yields, the 10 year average high dividend yield is 0.28% while the 5 year average high dividend yield is 0.18%. Since the higher yields were all at the beginning of the 10 year period, I think that the 5 year average is more realistic.
With this yield, the model price is $19.44. At the current price of $23.93, that is a premium of 23%.
The Graham number produces a model price of $20.60 which means a premium of 16.18%. Both these two evaluations have come in very close to each other. Let’s see what the discounted present value yields.
Looking at the P/E information, PGR is currently trading at a historically low P/E of 11.62. I will use this as the future P/E.
Equity growth rate has been very strong. The lowest equity growth rate is the 10 year average at 15.71%. However, the analysts have forecast a future EPS growth rate of 8.60%. Let’s use their more conservative number.
Also, I will assume that PGR will continue to pay me a whopping dividend yield of 0.18% and that they continue to grow this dividend at 6.67% (last year’s dividend growth which is lower than the 5 year average growth rate).
All these numbers combine to a model price of $13.79. This is by far the lowest valuation and represents a premium of 73% over the current price.
Check out my calculations here.
Conclusion:
This has been an interesting analysis - definitely not what I was expecting from a dividend aristocrat.
All the fundamentals look good except for the sales growth. That is a concern. But PGR has lots of room to increase their dividend payout ratio and they have definitely been able to grow the cash to pay for these dividends. However, they have been very conservative with their dividend growth increases.
All the models have this stock priced at a premium. And personally, I would like to see a stock that grows their dividends in the 10%+ range.
So I will pass on this one, although it is intriguing.
Full Disclosure: At the time of this writing, I do not own any shares in PGR.
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on July 4th, 2007 at 10:22 pm
Dividends Matter reader Raj has pointed out that starting in February 2006, Progressive has moved from paying regular quarterly dividends to an annual variable dividend.
You can read about it here.
Hopefully this will increase the dividend yield on this stock.
on July 5th, 2007 at 4:28 pm
Actually PGR has been paying a dividend since 1965
http://dividendinvestor.com/?symbol=pgr&submit=GO
But I think we all agree it is not much of a dividend. It appears by the last payout that they are starting to reward shareholders?