Company Description: Cincinnati Financial Corp. is an insurance holding company that primarily markets property and casualty coverage. It also conducts life insurance and asset management operations.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
CINF is trading at a premium to all four valuations above. The stock is trading at a 23.0% premium to its calculated fair value of $39.23. CINF did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
CINF earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. CINF earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1954 and has increased its dividend payments for 54 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $271 is below the $500 target I look for in a stock that has increased dividends as long as CINF has. The stock's current yield of 3.57% exceeds the 3.08% estimated 20-year average MMA rate.
Memberships and Peers: CINF is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company’s peer group includes: Axis Capital Holdings Ltd. (AXS) with a 2.4% yield, The Allstate Corporation (ALL) with a 1.9% yield, and The Travelers Companies, Inc. (TRV) with a 2.4% yield.
Conclusion: CINF did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks CINF as a 3-Star Hold stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $40.94 before CINF's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 54 years of consecutive dividend increases. At that price the stock would yield 4.2%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 3.3%. This dividend growth rate is equal higher than the 1.5% used in this analysis, thus providing no margin of safety. CINF has a risk rating of 1.5 which classifies it as a Low risk stock.
CINF was founded by independent insurance agents in order to better service their needs by providing them preferential treatment when picking an underwriter. The company primarily sells commercial property-casualty insurance with a smaller personal lines exposure marketed through a select group of independent insurance agencies. CINF is more heavily exposed to equity risk than its peers; however management is taking steps to re-balance its investments. The company should benefit from an improving pricing environment and steps management has taken to expand its operations.
With its business concentration in its Midwest region, the company is exposed to weather-related calamities. However, it enjoys superior operating efficiency in its niche with its underwriting capability via a vast agent network. To minimize its exposure to weather-related events, CINF has set up claims management and risk management tools. For example, the company is using a predictive modeling tool that should help it to improve pricing and risk selection. Long-term, these tools should help improve loss ratios. In addition, the company is experiencing premium growth from markets and increased pricing.
The company enjoys a low debt to total capital of 13% and currently has a FCF Payout of 32%, down from 35% in my last analysis. However, the stock is trading at a significant premium to my calculated fair value of $39.23. However, based on dividend fundamentals, I am will continue to look for opportunities to buy.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in CINF (3.3% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.
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