Consider Adding These 3 Insurance Companies To Your Dividend Income Portfolio

Published Sat, 26 Mar 2016 12:00 CET by

Insurance companies typically pay some of the highest dividends, thus offering an interesting option to investors seeking long-term, steady income. In fact, for income investors, sectors like the financial services and insurance industries are typical additions to portfolios seeking fixed income through dividends. The most common metric used by analysts to compare insurance companies is the dividend yield and as with any other sector, a higher dividend yield implies a stronger dividend investing potential.

This article discusses three mid-cap companies trading in the Insurance industry. The average dividend yield of the three companies is 2.32%, so it’s in line with the industry average of 2.25%, whereas their average payout ratio is 42.5%. All three companies have a low debt-to-equity ratio, suggesting that they are effective in debt management. Their average beta is 0.83, making them safe bets for value investors.

Arthur J. Gallagher, Brown and Brown and Hanover Insurance 6 months Stock Performance Graph
Arthur J. Gallagher & Co (NYSE: AJG) is an Illinois-based insurance broker company, which, through its subsidiaries, provides insurance brokerage and risk management services in the United States and internationally. Through its Brokerage, Risk Management, and Corporate segments, Arthur J. Gallagher offers retail and wholesale brokerage services and claim settlement and administration services. The company also implements multi-pollutant reduction technologies to reduce mercury, sulfur dioxide, and carbon dioxide emissions. Arthur J. Gallagher has a vast network of consultants and insurance brokers and provides its services to commercial, industrial, institutional, and governmental customers.

Strong Financial Results: Arthur J. Gallagher delivered strong full year 2015 results with the fourth quarter being excellent in all segments, but particularly in the Brokerage and Risk Management segments that delivered 10% growth in revenues and 12% in EBITDA. This has led to a combined 17% revenue growth for 2015 for both segments and a 22% EBITDA growth for the year. More specifically, revenues reached $5.39 billion, up 16.6% YoY to $4.63 billion, generating a profit margin of 29.9% from 30.3%. Operating expenses were $4.99 billion, up 17.0% YoY from $4.27 billion in the same period last year. Operating income reached $396.5 million, up 11.3% YoY to $356.4 million, generating a net income of $356.8 million, up 17.6% YoY to $303.4 million. Finally, Arthur J. Gallagher has a low debt-to-equity ratio of 0.57, which indicated effective debt management.

Dividend Strength: Arthur J. Gallagher declares an annualized dividend of $1.52 per share, yielding 3.45% at a payout ratio of 74%. The company dividend growth from 2000 to 2016 is 65.2% or 4.1% annually.

Future Outlook: Arthur J. Gallagher is expecting 2016 to be the year that the company will evolve to a company focused on innovation, harvesting synergies and implementing its service plans. This will allow new business growth and slight margin improvements that are likely to continue in 2017 as well. Analysts estimate an average EPS of $3.12 through 2018 – current EPS is $2.06 - and an average earnings growth of 8.43% through 2020.

Brown & Brown (NYSE: BRO) is a Florida-headquartered insurance broker that engages in the marketing and sale of insurance products in the United States, Bermuda, England and the Cayman Islands. Through its Retail, National Programs, Wholesale Brokerage and Services segments, Brown & Brown offers property and casualty insurance services as well as professional liability insurance for professional groups including dentists, oral surgeons, lawyers, CPA’s, opticians, insurance agents, financial advisors, and others. Furthermore, the company provides excess and surplus commercial and personal lines insurance products and services to retail insurance agencies as well as third-party claims administration and medical utilization management services.

Positive financial results: In 2015, Brown & Brown’s sustained strategy to look for organizations that fit culturally and make sense financially, while the acquisition marketplace remains active, has led to the generation of positive financial results. In particular, compared to FY 2014, the full year 2015 results are as follows:

  • Revenues $1.66 billion, up 5.4% YoY from $1.57 billion
  • Operating expenses $1.22 billion, up 5.2% YoY, from $1.16 billion
  • Operating income $441.2 million, up 6.2% YoY from $415.6 million
  • Net income $243.3 million, up 17.6% YoY from $206.9 million
  • Debt-to-equity ratio 0.50 suggests a financially healthy company

Effective Share Buyback Program: During the fourth quarter of 2015, Brown & Brown has implemented a $75 million accelerated share repurchase program, completed in January 2016, with a final settlement of about 400,000 shares. The share buyback programs totaled $175 million over the past 12 months and has helped the company to lower its outstanding share count in Q4 2015 by 2.2% compared to 2014. Currently, Brown & Brown has $375 million of authorization for share buybacks under the $400 million approval received from the Board of Directors in July of 2015 and will continue to seek share repurchases, along with other options for driving strong shareholder returns. Moreover, the company declares an annualized dividend per share of $0.49, yielding 1.38% at a payout ratio of 29%. The current dividend represents the 22nd consecutive year of dividend increases, whereas the company’s dividend growth for the period 2000-2016 is 63.3% or 4.0% annually.

Looking Ahead: Brown & Brown’s strategic plans focus on its key business goals of driving organic growth, improving customer retention, lowering operating costs and achieving better business intelligence. To that end, the company seeks standardization, optimization and innovation to optimize its business systems and improve the customer experience. For 2016, Brown & Brown is expected to implement a new financial management reporting system that will allow additional insight, analytics, and efficiency.

Name Price ($) 52 wk low 52 wk high 52 wk low % 52 wk high % Market Cap ($ b) P/E D/E Beta Payout Ratio
Arthur J. Gallagher 43.98 35.96 49.59 22.30% -11.31% 7.81 21.41 0.57 1.02 74%
Brown & Brown 35.22 28.41 35.60 23.97% -1.07% 4.90 20.89 0.50 0.57 29%
Hanover Insurance 85.73 68.55 87.44 25.06% -1.96% 3.72 11.72 0.29 0.90 25%

Hanover Insurance Group (NYSE: THG) is a Massachusetts-based insurance broker, which, through its subsidiaries provides a range of property and casualty insurance products and services in the United States and internationally. Through its Commercial Lines, Personal Lines, Chaucer, and Other segments, the Hanover Insurance Group offers commercial property insurance products as well as personal coverage, and specialist coverage. The company also provides investment management and advisory services to institutions, pension funds, and other organizations. The Hanover Insurance Group uses a network of independent agents and brokers.

Strong Full Year Results: For 2015, the Hanover Insurance Group has delivered strong operating results, realizing a strong return on equity at 11%. The company's effectiveness in strategy implementation has led to a strong operational performance in all segments and a solidification of its market position. At the same time, the Hanover Insurance Group has managed to improve its portfolio and enhance its profitability. More specifically, revenues were $5.06 billion, slightly down 0.2% YoY from $5.07 billion in the same period last year. On the upside, operating expenses were down 1.5% YoY to $4.56 billion from $4.63 billion, generating an operating income of $499.5 million, up 12.7% YoY from $443.2 million and a net income of $331.5 million, up 17.6% YoY from 282.00 million in full year results 2014. Debt-to-equity ratio is 0.29.

Looking Ahead: The Hanover Insurance Group delivers an annualized dividend of $1.84 per share, yielding 2.12% at a payout ratio of 25%, whereas the dividend growth for the period 2000-2016 is 84.0% or 5.3% annually. Looking towards 2016, the company is expected to continue to capitalize on its leading position in the industry and especially in the targeted specialist classes, to keep on delivering supporting margins. This will allow the Hanover Insurance Group to build sustainable growth and delivering shareholder value in the coming quarters.