If you're a dividend investor, you want to invest in companies that make continuous dividend payments. If you can find a company that increases those dividends regularly, even better. S&P 500 companies that increase dividends annually for 25 years or more earn the coveted title of Dividend Aristocrats.
Dividend Aristocrats generally provide investors with a sense of security, thanks to their reliable dividend increases. These companies have proven themselves as stalwarts operating in more established industries, have a steady earnings history, and have less volatile stock prices as a result.
The insurance industry produces a lot of solid dividend companies, and one insurer that has demonstrated its ability to increase its dividends annually is Travelers (TRV 2.51%). It's well on its way to Dividend Aristocrat status, rewarding investors with higher dividend payments for 17 consecutive years now.
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A wide array of products generate steady revenue growth
Travelers is a property and casualty insurer that provides a variety of coverage options to individuals, businesses, and governments. Its product lines includes workers' compensation, personal and commercial automobile, property, and general liability coverage, just to name a few.
According to S&P Global Market Intelligence, Travelers was the leading commercial insurance writer in the U.S. in 2020. The breadth of the company's product offerings has been an advantage, as well, as it's the only commercial insurer with a top-five position across five major product lines (commercial, auto, general liability, workers’ compensation, and surety).
Travelers has increased its dividend steadily, thanks to continuous premium growth. In the past 10 years, the insurer has grown premiums from $21.4 billion to $29 billion, for a sound growth rate of 3.09% annually.
Steady revenue growth and good expense management are the keys to increasing its dividend on a consistent basis. Travelers has increased its dividend payout at an 8.4% compound annual growth rate since 2007. The company's longevity can't be ignored, either, and it's paid cash dividends without any interruption for over 150 years.
A history of underwriting profitability despite difficult conditions
Travelers' advantage is its history of underwriting profitable policies across different lines of coverage, as seen by its solid combined ratio, which is a measure of profitability in insurance. A ratio below 100% means a company is underwriting profitable policies, while a ratio over 100% indicates that policies are generating a loss.
In the past 15 years, the company's combined ratio has only gone above 100% once, in 2011. Since then, Travelers has had an average combined ratio of 93.6%. However, this has ticked slightly higher in recent years, and the past four years saw an average combined ratio of 96.6%.
The uptick in combined ratio was due to a difficult insurance market during this time period. Insurance markets are highly cyclical, and in the past few years, they've been tough on insurers, which have seen increased catastrophe losses from extreme weather events.
As a result of a more difficult market, insurers raise premiums, get more conservative with underwriting, and cut lines of coverage. While Travelers has navigated this hardening market quite well, investors want to keep an eye out for an uptick in its combined ratio. A pickup could hurt the insurer's profitability and thus impact the company's ability to keep increasing dividends.
Economic tailwinds and rising interest rates could push revenue higher
When insurance companies collect premiums, they put excess funds to work and rely on investment income for some portion of their profits. The past decade has largely seen a period of lower interest rates, which has hurt Travelers' ability to generate investment income. Generating yield has been challenging, and this past year, interest rates were cut to historic lows. Despite this, Travelers generated 7% of its revenue from interest income or gains in 2020.
As the economy returns to normal, the Federal Reserve will likely begin easing up on their aggressive policies, which will likely include interest-rate increases. While Fed officials currently expect low rates to continue through 2023, the timeline could be sped up if inflation rates remain elevated in the coming months.
In April, the core Consumer Price Index, a measure of inflation, came in at 4.2% year over year, beating estimates of 3.6%. If the CPI remains elevated in the next few months, it wouldn't be out of the question for the Fed to raise interest rates sooner than expected.
Even Morgan Stanley CEO James Gorman noted that his firm expects rates to rise as early as 2022. If such interest-rate hikes do come, rate-sensitive companies like Travelers would stand to be big beneficiaries.
Travelers pays out an attractive yield of 2.15%, edging out competitors Allstate and Chubb, which offer yields of 1.79% and 1.87%, respectively. The insurer has done a stellar job of increasing its premiums annually across a variety of insurance products while managing its combined ratio in the process. When you couple this with the company's history of dividend payments, Travelers looks like an attractive stock to buy before it becomes a Dividend Aristocrat.
