Chubb Corporation (CB) Dividend Stock Analysis

The Chubb Corporation, through its subsidiaries, provides property and casualty insurance to businesses and individuals. The company operates through three segments: Personal Insurance, Commercial Insurance, and Specialty Insurance. The company is member of the S&P Dividend Aristocrats index.Chubb has increased dividends for 45 years in a row. The company announced a 5.70% dividend increase in February 2010, plus a 14 million share repurchase initiative.

Over the past decade this dividend stock has delivered an average total return of 5.90% annually.


The company has managed to deliver a 13.30% average annual increase in its EPS between 2000 and 2009. Chubb is expected to earn $5.30 share in FY 2010, followed by $5.60/share in FY 2011.

The Return on Equity has remained around 15% for the latter part of the last decade, after falling to as low as 2% earlier. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Annual dividends have increased by an average of 8.70 % annually since 2000, which is slower than the growth in EPS. The disparity is mostly due to a gradual decrease in the dividend payout ratio and the billions of dollars the insurer has spent on stock buybacks.A 9 % growth in dividends translates into the dividend payment doubling almost every eight years. If we look at historical data, going as far back as 1984, Chubb has actually managed to double its dividend payment every nine years on average.

The dividend payout ratio has been on the decline, and is still much lower than my 50% threshold. 2001 and 2002 stick as outliers, since earnings per share were lower on high underwriting combined ratios. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Chubb is trading at 9.20 times earnings, yields 3.10% and has an adequately covered dividend payment. In comparison rival Travelers Cos (TRV) trades at a P/E multiple of 8 and yields 2.90% , while Cincinnati Financial (CINF) trades at a P/E multiple of 9 and yields 5.90%. Berkshire Hathaway (BRK.B) is also a competitor to Chubb(CB), although it trades at a P/E of 22, and does not pay a dividend. The company does spend a lot of its cash flow on stock buybacks, which could prove beneficial in the long run since it could provide above average dividend growth over time for the same effort. I like the company and its business model. Insurance companies like Chubb (CB) are a way for investors to fill in the need for exposure to the financial sector, after several high profile payers like Citigroup (C) and Bank of America (BAC) cut their distributions.I believe that the company is attractively valued at the moment; thus I would be looking forward to adding to my position in Chubb (CB).

Full Disclosure: Long CB

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Dividend yield or dividend growth?

I have always had a requirement for a minimum dividend yield, whenever I have analyzed and purchased dividend stocks. The reason for this requirement was to provide with at least some dividend income in case the stock stopped increasing distributions for some reason. If a stock stopped raising distributions I would put it on my hold list and would stop contributing new funds to the position, while reinvesting dividends in other more promising candidates. I do require at least a decade of consistent annual dividend increases, before even looking at a stock. This decreases the size of my watch list to less than 300 stocks.

My entry yield requirement has ranged from a low of 2% in 2008 to a high of 3% since 2009. After analyzing some of the most successful dividend stocks such as Wal-Mart (WMT), Johnson & Johnson (JNJ), McDonald’s (MCD) and Becton Dickinson (BDX) I have come to realize that a minimum yield requirement could have been a detriment to acquiring those stocks when they first became dividend achievers.

Stocks such as Johnson & Johnson (JNJ) never really yielded more than 3% until 2008 for example. As a result I would have missed on strong double digit dividend growth for several decades, which would have surely turned the yield on cost on original investments into the triple digits. A company that yields 2% currently but manages to raise distributions by 12% due to strong earnings growth would double the yield on cost in 6 years.

It seems that a more flexible approach would be to analyze the average yields investors could have received over the past decade and then decide whether it makes sense to purchase the stock based on valuation and earnings power. In this sense making sure not to pay over twenty times earnings or accepting an unreasonably high dividend payout is very important.

Another thing to do is to simply ignore current yield altogether and instead focus on the fundamentals, while evaluating whether the company could reasonably expect to boost distributions for the next decade. A company with a yield lower than 3% would definitely have to have an average dividend growth of at least ten percent.

While I would ignore current yield, I could still create a dividend portfolio where I try to obtain an average current dividend yield of 3% or 4%. This could be achieved by grouping high yielding stocks with low yielding dividend growth stocks. The high yielding stocks typically are slow growing and would provide current income. The low yielding stocks would have a growth component, which would ensure purchasing power protection from inflation. If an investor decides to create a diversified dividend portfolio with 40 individual stocks in it, they could purchase 20 dividend growth stocks yielding 2% or 3% on average and 20 stocks which yield 5% - 6% on average in order to obtain a portfolio yield of 4% for example. Examples of high yielding stocks that could used in this strategy include Realty Income (O), master limited partnerships such as Kinder Morgan Energy (KMP) ,utilities companies such as Con Edison (ED) or telecom firms such as AT&T (T).

To summarize, investors do not need to choose between yield and dividend growth. Instead, they could create portfolios where they take advantage of both.

Full Disclosure: Long JNJ, MCD, WMT, O, KMP, ED, T,

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General Electric (GE) raises dividend; 15 other companies follow suit

General Electric Company (GE) operates as a technology, media, and financial services company worldwide. Back in 2009, General Electric (GE) cut dividends by 68% to 10 cents/share. Investors, who just a few months earlier were reassured by the company’s CEO that the dividend is safe, rushed to the exits, sending the stock price to its lowest levels in a decade. The company halted its stock buyback program, and issued shares to the public. Legendary Investor Warren Buffett also made an investment in the conglomerate, by putting several billion in exchange for preferred stock yielding 10%. Almost one and half years after the dividend was cut, the company raised its quarterly dividend 20% to 12 cents/share on Friday. The news sent the stock over 3% higher for the day. Whether the company can rebuild its streak of consecutive dividend increases remains to be seen however.

“We are able to restore the GE dividend at a historical payout level for 2010 earlier than previously anticipated and to extend our share buyback program because of continued strong cash generation, recovery at GE Capital, and solid underlying performance in our Industrial businesses through the first half of 2010,” GE CEO Jeff Immelt said. “In addition, the Company continues to plan on capitalizing on strategic and financially attractive inorganic growth opportunities. “
“We are executing well, progressing on our plans to make GE Capital a smaller, more competitive specialty-finance company, and continuing to generate strong cash flow,” Immelt said. “This gives us the flexibility to allocate capital for growth and shareholder value, while keeping GE safe and secure.”

Other companies which are seldom mentioned, but should probably get much more credit include energy master limited partnerships, which boast strong cash flows and stable distributions. In addition to that, the toll-bridge business model for those energy transportation companies has enabled many of them to raised distributions more than once per year.

Enbridge Energy Partners, L.P. (EEP) owns and operates crude oil and liquid petroleum transportation and storage assets, as well as natural gas gathering, treating, processing, transmission, and marketing assets in the United States. The company announced a cash distribution of $1.0275 per unit, which was an increase of 2.5 percent over previous quarters distribution per unit. Yield: 7.10%

Navios Maritime Partners L.P. (NMM) operates as an international owner and operator of drybulk carriers in Greece. Navios Maritime Partners L.P. increased cash distributions by 1.20% to $0.42 per unit and has consistently raised distributions since going public in 2008. Yield: 9.20%

Western Gas Partners, LP (WES) owns, operates, acquires, and develops midstream energy assets in east and west Texas, the Rocky Mountains, and the Mid-Continent. This master limited partnership raised quarterly distributions by 3% to 35 cents/unit and has consistently raised distributions since going public in 2008. Yield: 5.70%

El Paso Pipeline Partners, L.P. (EPB) engages in the ownership and operation of natural gas transportation pipelines and storage assets in the United States. declared a $0.40 per unit quarterly cash distribution for the second quarter of 2010, or $1.60 per unit on an annualized basis. This distribution represents a 21% increase from the $0.33 per unit paid for the second quarter 2009 and a 5% increase from the $0.38 per unit paid for the first quarter 2010. El Paso Pipeline Partners, L.P. has raised distributions every quarter since going public in 2008. Yield: 5.10%

Vanguard Natural Resources, LLC, (VNR) through its subsidiaries, engages in the acquisition and development of natural gas and oil properties in the United States. The company raised quarterly distributions by 4.80% to 55 cents/unit. Vanguard Natural Resources, LLC has consistently raised distributions since going public in 2008. Yield: 8.90%

Spectra Energy Partners, LP, (SEP) through its subsidiaries, engages in the transportation of natural gas through interstate pipeline systems, and the storage of natural gas in underground facilities in the United States. This master limited partnership raised quarterly distributions by 2.40% to 43 cents/unit. Spectra Energy Partners, LP has raised distributions every quarter since going public in 2007. Yield: 4.90%

Other companies raising dividend include:

Starbucks Corporation (SBUX) engages in the purchase, roasting, and sale of whole bean coffees worldwide. The company increased quarterly dividend 30% to 13 cent/share. This was the first dividend increase since the company started paying dividends earlier this year. Yield: 2.10%

Westfield Financial, Inc. (WFD) operates as the bank holding company for Westfield Bank that provides various banking products and services to businesses and individuals in Massachusetts. The company raised dividends by 20% to $0.06 per share. This company has not only consistently raised distributions since 2003, but also frequently pays special dividends to shareholders. Yield: 2.80%

Eaton Corporation (ETN) operates as a power management company primarily in the United States, Canada, Latin America, Europe, and the Asia Pacific. The company also increased their quarterly dividend 16% to 58 cents/share. This was the first dividend increase since 2008. Yield: 3%

Solera Holdings, Inc. (SLH) provides software and services to the automobile insurance claims processing industry. The company’s board of directors approved a 20% increase in its quarterly dividend to 7.50 cents/share. This was the first dividend increase since the company started paying dividends in 2009. Yield: 0.80%

Digital Realty Trust, Inc. (DLR), a real estate investment trust (REIT), through its controlling interest in Digital Realty Trust, L.P., engages in the ownership, acquisition, development, redevelopment, and management of technology-related real estate. The company increased quarterly dividends by 10.30% to 53 cents/share. The company has consistently raised distributions since 2004. Yield: 3.50%

Lindsay Corporation (LNN) designs, manufactures, and sells automated agricultural irrigation systems that are primarily used in the agricultural industry to increase or stabilize crop production while conserving water, energy, and labor in the United States and internationally. The board of directors declared a six percent increase in its regular quarterly cash dividend to $0.085/share. The company has consistently raised distributions since 2003. Yield: 1%

Altera Corporation (ALTR) designs, manufactures, and markets programmable logic devices (PLD), HardCopy application-specific integrated circuit (ASIC) devices, pre-defined design building blocks, and associated development tools. The company raised quarterly dividends by 20% to 6 cents/share. The company doesn’t have a long history of dividend increases. Yield: 0.80%

Airgas, Inc., (ARG) through its subsidiaries, distributes industrial, medical, and specialty gases, as well as hardgoods in the United States. The company raised quarterly dividends from 22 to 25 cents/share. The company has consistently raised distributions since 2003. Yield: 1.50%

A. O. Smith Corporation (AOS) engages in the manufacture and sale of water heating equipment and electric motors for the residential, commercial, and industrial end markets in the United States and internationally. The Board of Directors approved an 8% increase in the company's quarterly cash dividend to a rate of $0.21/share. This dividend achiever has raised distributions for 17 consecutive years.Yield: 1.50%

On a side note, investors who find Enbridge Energy Partners, L.P. (EEP) to be attractively valued at the moment, but are not willing to deal with further complications in their tax returns, could consider purchasing Enbridge Energy Management, L.L.C. (EEQ) shares instead. Enbridge Energy Management, L.L.C. does not pay distributions in cash, but automatically distributes fractional shares to shareholders on record. They pay their distributions directly as additional shares, which is similar to automatic dividend reinvestment. If you choose to invest in Kinder Morgan Energy (KMP) or Enbridge Energy Partners (EEP) in an IRA, consider investing in Kinder Morgan Management (KMR) and Enbridge Energy Management, L.L.C. (EEQ). KMR and EEQ are great vehicles for taxable accounts as well since their distributions are not taxable when received, and thus shareholders are not issued an annual 1099 tax form. You would pay taxes only when you sell your units.The taxation characteristics of your investments are just one part of the investment puzzle. Always make sure to investigate the company’s fundamentals and do your homework before investing in stocks.

Full Disclosure: Long EEQ and KMR

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Wal-Mart (WMT): A High Dividend Growth Stock

Wal-Mart Stores, Inc. operates retail stores in various formats worldwide. The company is member of the S&P 500, Dow Jones Industrials Average and the S&P Dividend Aristocrats indexes. Wal-Mart Stores has consistently increased dividends every year for 36 years. The company announced an 11% dividend raise in March 2010.

Over the past decade this dividend stock has delivered a negative average total return of 0.50% annually. The stock is trading at the same levels it was changing hands a decade ago.

The company has managed to deliver an 11.60% average annual increase in its EPS between 2000 and 2009. Next year Wal-Mart is expected to earn $4.01 share, followed by $4.40/share in FY 2011.

With growth slowing down, the price/earnings multiple could contract even lower. This being said I believe Wal-Mart is an excellent business, as it always investing in innovation that helps control inventory and focus on certain types of merchandise that offsets weaker demand in recessions. Despite the expected slow down in consumer spending, Wal Mart is well positioned with its diverse product mix of consumer staples and foods that it is offering on its shelves. It has lower prices in comparison to its competitors, which could drive more traffic for the retailer. Just like Walgreen (WAG), Wal-Mart Stores expects to slow down on the rate of opening new stores and instead would try to focus on developing the profitability of existing locations, without cannibalizing sales in its existing outlets. The lower capital spending has freed up enough cash flow to fund the company's agressive share buyback program.

A potential growth area for the company are its international operations, where selling space has increased by more than 40% since 2006. Wal-Mart (WMT) currently has 267 locations in China, operating under Wal-Mart or Trust Mart’s names. The company had 3615 international locations at the end of 2008. There is still room for growth in Chinese operations, fueled by the increase in number of middle-class families in the country. For Wal-Mart, China represents the biggest frontier since it conquered America. China's voracious consumers are pushing retail sales to a 15 percent annual growth rate; that market will hit $860 billion by 2009, according to Bain & Co. (source).

The Return on Equity has firmly remained above 20%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

Annual dividends have increased by an average of 18.30 % per annum since 2000, which is higher than the growth in EPS. The disparity is mostly due to a gradual increase in the dividend payout ratio and the billions of dollars the Bentonville, AR based retailer has spend on stock buybacks.An 18 % growth in dividends translates into the dividend payment doubling almost every four years. If we look at historical data, going as far back as 1981, Wal-Mart has actually managed to double its dividend payment every three years on average. Wal-Mart is an example of a company that kept paying dividends while enjoying strong double digit growth for several decades.

The slowdown in capital spending could free up more cash for dividend increases and share buybacks. Thus, despite expectations for EPS growth of 7% over the next few years, Wal-Mart could still manage to deliver low double-digit dividend growth.The dividend payout ratio has been on the rise, although it is still much lower than my 50% threshold. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Wal-Mart Stores is trading at 13.40 times earnings, yields 2.40% and has an adequately covered dividend payment. The company does spend a lot of its cash flow on stock buybacks, which could prove beneficial in the long run since it could provide above average dividend growth over time for the same effort.

Full Disclosure: Long WMT

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Strong Brands Grow Dividends

I recently analyzed the annual report of spirits maker Brown Forman (BF-B), which is one of the newest additions to the S&P Dividend Aristocrats index. I was amazed to learn that some of its top selling products were Jack Daniel’s Tennessee Whiskey and Finlandia. It is very intriguing how the company has been able to leverage the brand name of its top selling products by cutting costs to the bone and increasing efficiencies, while at the same time expanding sales internationally. This had translated into growth in earnings per share, which also fueled a 9.8% average annual growth in dividends over the past decade.

The similarities between Brown-Forman (BF-B) and other prominent dividend aristocrats do not end here. Most elite dividend stocks are household names, whose products and services are available to consumers and businesses worldwide. They are easily recognizable names for which consumers are willing to pay a premium in order to enjoy them.

The strong brand name provides a good differentiation strategy versus competitors, which ensures that the company is able to charge a premium for its products and have an enduring wide-moat business.

Other companies with strong brands which have been able to provide a growing stream of dividends include Procter & Gamble (PG), McDonald’s (MCD), Altria Group (MO), Coca Cola (KO) and Abbott Laboratories (ABT).

The Procter & Gamble Company (PG) engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. The company has rewarded stockholders with dividend increases for 54 consecutive years. Annual dividends have increased by an average of 10.70% annually over the past decade. The stock currently yields 3.10%. Check my analysis of the stock.

Altria Group, Inc., (MO) through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in the United States. Philip Morris International Inc (PM) on the other hand manufactures and sells cigarettes and other tobacco products in markets outside of the United States of America. Before spinning off Kraft (KFT) and Philip Morris International (PM), Altria had an uninterrupted streak of 41 consecutive annual dividend increases. The spun out companies are also likely to return increasing amounts of profits back to shareholders in the form of share buybacks and dividend increases. I like both MO and PM for global exposure to tobacco. The stock currently yields 6.60%. Check my analysis of both stocks.

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. Its restaurants offer various food items, soft drinks, and coffee and other beverages. The golden arches has raised dividends for 33 years. Annual dividends have increased by an average of 26.20% annually over the past decade. The stock currently yields 3.10%. Check my analysis of the stock.

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. It principally offers sparkling and still beverages. The company has increased distributions for 48 consecutive years. Annual dividends have increased by an average of 10% annually over the past decade. The stock currently yields 3.40%. Check my analysis of the stock.

Abbott Laboratories (ABT), which manufactures and sells health care products worldwide, has raised dividends for 38 consecutive years. Annual dividends have increased by an average of 8.80% annually over the past decade. The stock currently yields 3.70%. Check my analysis of Abbott Laboratories (ABT).

Just because a company owns a strong brand, investors shouldn’t simply rush in to purchase the stock. Overpaying for future earnings is likely to cause diminished returns over time. That’s why having a strict entry criteria and requiring at least a decade of consistent earnings and dividend growth should weed out the fads from the trends.

Full Disclosure: Long ABT, KO, MCD, MO, PG

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