CB Dividend Analysis

The Chubb Corporation, through its subsidiaries, provides property and casualty insurance to businesses and individuals. The company operates through three segments: Commercial Insurance, Specialty Insurance, and Personal Insurance.

The company is a dividend aristocrat as well as a major component of the S&P 500 index. It has been increasing its dividends for the past 42 consecutive years. From 1998 up until 2007 this dividend growth stock has delivered an annual average total return of 6.70 % to its shareholders.

At the same time company has managed to deliver an impressive 14.35% average annual increase in its EPS since 1998. Earnings per share was affected in 2000 and 2001 but managed to bounce off their recessionary lows.

The ROE fell to less than 2% in 2001 from 12% in the late 1990’s before increasing to just under 20% over the past couple of years.

Annual dividend payments have increased over the past 10 years by an average of 7.20% annually, which is significantly below the growth in EPS. A 7% growth in dividends translates into the dividend payment doubling almost every 10 years. If we look at historical data, going as far back as 1984, CB has actually managed to double its dividend payments every eight years.

If we invested $100,000 in CB on December 31, 1997 we would have bought 2785 shares (Adjusted for a 2:1 stock split in April 2006). In March 1998 your quarterly dividend income would have been $431.68. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $988.90 by December 2007. For a period of 10 years, your quarterly dividend income has increased by 87 %. If you reinvested it though, your quarterly dividend income would have increased by 129%.

The Dividend Payout Ratio spiked to over 200% in 2001 from the low 30’s% in the late 1990’s before falling to less than 17% over the past couple of years. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings. Another plus for CB is that the company did not suspend or cut its dividend in 2000 and 2001 when earnings decreased significantly.

I think that CB is attractively valued with its low price/earnings multiple of 7.30 and above-average yield at 2.60%.

Disclosure: I own shares of CB

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Back test Results of one Rule of Thumb

One of my favorite rules of thumb is that a dollar saved in your twenties supplies one dollar in income in your sixties. In order to test the validity of this rule I used historical S&P 500 total return data from Prof Shiller for the period from 1921 – 2008.

I assumed that a person would invest $1000 once in a single year and would not contribute more money later. I would then calculate the total return of the investment as well as its dividend income over the years. I would then pick a year down the road, where the dividend income is above $1000 for the year for the first time ever. For simplicity purposes I ignored the effect of taxes, transaction costs and inflation.

For example, if you invested $1000 in the S&P 500 in 1921, your investment would have produced annual dividend income of over $1000 for the first time in 1952.
The last year for which I was able to achieve dividend income of over $1000 was 1967.
The results of this study confirmed the validity of the rule of thumb that I was testing. I found that the average time it took a $1000 investment to produce $1000 in dividend income for a full year was 35 years. In other words if you contributed $1000 towards your retirement by investing in a broadly diversified stock index fund when you are 23 in 2008, you would expect to achieve $1000 in dividend income on average by the age of 58.

The chart below shows that the longest period to achieve the desired dividend income was 45 years, for those who started in 1928. The shortest it took to achieve $1000 in dividend income from a $1000 investment was only 27 years for those who started in 1941.

The time it takes to achieve $1000 in dividend income from a $1000 investment has been increasing since it hit a bottom in 1941. It would be interesting to see how the decrease in overall dividend yields over the past 20 years has affected this rule of thumb.

















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McGraw-Hill (MHP) Dividend Analysis

The McGraw-Hill Companies, Inc. provides information services and products to the education, financial services, and business information markets worldwide. Its McGraw-Hill Education segment operates as a global educational publisher.

It is a dividend aristocrat as well as a major component of the S&P 500 index. It has been increasing its dividends for the past 35 consecutive years. From 1998 up until 2007 this dividend growth stock has delivered an annual average total return of 10.80 % to its shareholders. The majority of the gains were erased in 2007 though, when the stock dropped from a high of 72.50 in June 2007 to a low of 43.46 by December.

At the same time company has managed to deliver an impressive 23.8% average annual increase in its EPS since 1998.

The ROE has increased from 25% in 1998 to over 65% in 2007. Return on Total assets also increased from a low of 8.80% in 1998 to a high of 16% in 2007.

Annual dividend payments have increased over the past 10 years by an average of 8.60% annually, which is significantly below the growth in EPS. A 9% growth in dividends translates into the dividend payment doubling almost every 8 years. If we look at historical data, going as far back as 1987, MHP has actually managed to double its dividend payments every ten and a half years.

If we invested $100,000 in MHP on December 31, 1997 we would have bought 5405 shares (Adjusted for two 2:1 stock splits in 1999 and 2005). In February 1998 your quarterly dividend income would have been $527. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend income would have risen to $1293.34 by November 2007. For a period of 10 years, your quarterly dividend income has increased by 110 %. If you reinvested it though, your quarterly dividend income would have increased by 145%.

The dividend payout has decreased from 90% in 1998 to less than 30% by the end of the study period. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that MHP is attractively valued with its low price/earnings multiple of 12.50 and above-average yield at 2.40%. Given the recent sharp declines in the stock, I think that the best strategy in accumulating MHP is to spread my purchases over several months as opposed to investing all my money at once.

Disclosure: I own shares of MHP

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The Bottom is in

After hitting a low at $126.07 on March 17, SPY has bounced off strongly off those lows. Coincidentally the March lows for the ETF were pretty close to the January 22nd lows at $126. This created a chart formation which most technical analysts out there refer to as a double bottom, which is bullish for stocks.

The second catalyst that made me a big believer that the bottom is in was an article, published in the WSJ, called "Stocks Tarnished By 'Lost Decade'".

Initially, after reading the title, I decided that US stocks have been a terrible performer over the past 10 years. I wished I had bought emerging market funds or commodities ten years ago. But then I remembered that such major headlines always come at major market bottoms. Typically when headlines scream bull or bear a good contrarian strategy is to run in the opposite way.
For example, in August 1979 a famous headline “The Death of Equities” marked a bottom in the US stock market. The S&P 500 rallied over 40% until 1983, when another headline “Rebirth of equities” appeared.

Thus, as long as the SPY does not close below $126, I would be bullish on the stock market. In addition to that, I believe that US stocks would outperform most if not all of the asset classes which it has been outperformed by over the past decade. This includes international stocks, emerging markets and even commodities.

For the past 137 years, US stocks’ annual returns have been negative only 37 times. If history is any guide, I would expect stocks to keep rising 73% of the time. In addition, the average annual gain after a losing year was 11.73% versus a 9.98% return after a winning year.

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Clorox (CLX) Dividend Analysis

The Clorox Company manufactures and markets a range of consumer products.
It is a dividend aristocrat as well as a component of the S&P 500 index. Over the past 10 years this dividend growth stock has delivered an annual average total return of 7.20 % to its shareholders. At the same time company has managed to deliver an impressive 13.40% average annual increase in its EPS.

Annual dividend payments have increased over the past 10 years by an average of 9% annually, which is less than the growth in EPS. A 9% growth in dividends translates into the dividend payment doubling almost every 8 years. If we look at historical data, going as far back as 1987, CLX has actually managed to double its dividend payments every seven years. This is because the company had a faster dividend growth rate in the 1980’s and early 1990’s.

If we invested $100,000 in CLX on December 31, 1997 we would have bought 6991 shares (Adjusted for 2:1 stock split in August 1999). Your first dividend payment would have been $403.20 in January 1998. If you kept reinvesting the dividends though instead of spending them, your quarterly dividend payment would have risen to $1219.60 by October 2007. For a period of 10 years, your quarterly dividend income has increased by 150 %. If you reinvested it though, your quarterly dividend income would have increased by 199%.

The dividend payout has remained below 50% since 2003. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that CLX is attractively valued with its low price/earnings multiple of 17 and above-average yield at 2.80%. (which is higher than the 2.03% yield on the SPY)

Disclosure: I own shares of CLX

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