Published Wed, 16 Sep 2015 09:30 by DividendYields.orgThe most important determinant of a stock’s return is the price investors pay for it. There are globally-known companies with good quality and management, yet their stock prices do not reflect their growth potential and/or competitive position. It is also essential to understand that some companies are riskier than others and therefore a larger margin of safety is required to invest in them. The Graham number measures the fundamental value of a stock by taking into account earning per share (EPS) and book value per share (BVPS) and indicates the highest price a defensive investor would pay for the stock. Any stock price below the Graham number is considered undervalued, thus leaving room for higher return on investment. The formula for the Graham Number = SQRT (22.5 x EPS x BVPS).
The article discusses 3 mid-cap property & casualty insurance companies, which, according to the Graham number, are undervalued and pay dividends at a steady rate.
American Financial Group (NYSE: AFG) is a Cincinnati-based property and casualty insurance holding company that provides specialized commercial insurance products as well as fixed and fixed-indexed annuities through Great American Insurance Group to retailers and businesses both in the U.S. and internationally. In Q2 2015, AFG reported 47% YoY growth in dividends and repurchases of common stock ($122 million from $83 million in Q2 2014), whereas AFG’s excess capital grew by 2.6%, reaching $1.18 billion from $1.15 billion in the same quarter last year. Currently, AFG trades at a discount to fair value rate of 93.3%, suggesting that the stock is slightly undervalued. Considering the low Debt/Equity ratio, well below 2, low payout ratio and a beta of 0.81, AFG is a safe undervalued stock that delivers dividends at a steady rate. Analyst consensus estimates an average annual rate of 8% for the next five years, and an average EPS of $5.58 up to 2016, allowing an adequate margin of safety.
CNA Financial Corporation (NYSE: CNA) is one of the leading property and casualty insurance companies providing insurance protection services to retailers and businesses, including risk management and claim administration services, both in the U.S and internationally through its subsidiaries. Currently, CNA trades at a discount to fair value rate of 65.63%, suggesting that the stock is considerably undervalued. CAN’s reported Q2 2015 66.5% YoY growth in dividends ($676 million from $406 million in Q2 2014) as well as 135.7% YoY growth in equity securities ($33 million from $14 million in Q2 2014) are in line with consensus forecast for long-term 5-years growth of 7.5% annually and an average EPS of $3.15 up to 2016. Given the company’s low payout ratio and Graham number, CAN is definitely selling for a good price, leaving room for further growth.
|Name||Price ($)||Market Cap ($ b)||P/E||EPS||BVPS||Graham Number||Discount to Fair Value||D/E||Beta||Payout Ratio|
Cincinnati Financial Corporation (Nasdaq: CINF) is an Ohio based insurance holding company engaging in property and casualty insurance through a broad network of independent insurance and financial services subsidiaries across the U.S. Being in the top-25 property casualty insurer groups, the company provides a wide range of insurance products, including life insurance, disability income policies and fixed annuities. CINF revised its value creation ratio to range between 10% and 13% up to 2017, following the 33.9% YoY growth in cash flow from operating activities ($470 million from $351 million in Q2 2014). Given that the stock is fairly undervalued, trading at a discount to fair value rate of 89.1%, the value creation ratio suggests CINF’s ability to increase its book value and deliver higher dividends to its shareholders. Additionally, the company’s strategic decision to engage in mergers and acquisitions to deliver long-term shareholder value improves its growth potential, which is also reflected in an average EPS of $2.60 up to 2016.
|Stock name||Dividend Yield|
|American Financial Group||1.62|
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