The next selection for the real-money Inflation-Protected Income Growth Portfolio is a relatively small player in the auto insurance business, Infinity Property & Casualty (NASDAQ:IPCC). Infinity is relatively new as a public company, having been spun off from American Financial Group in 2002. Despite its fairly short history as an independently public company, Infinity Property & Casualty traces its origins to 1955, which suggests some staying power.
Why it's worth owning in the iPIG Portfolio
To earn a spot in the portfolio, a company has to pass a series of tests related to its dividends, its balance sheet, its valuation, and its potential to diversify the portfolio.
- Payment: Infinity Property & Casualty's annual dividend stands at $1.44 per share for a yield of about 2.2% based on Monday's closing price.
- Growth history: Infinity went independently public in 2002, initiated its dividend in 2003, and has been increasing it annually since 2005. While that's not a long track record, it is a promising trend, and Infinity managed to continue increasing its dividend through the recent financial crisis. Most recently, Infinity Property & Casualty increased its dividend by 20% in February to reach its current level.
- Reasons to believe the growth can continue: With a payout ratio of about 43%, the company retains just over half of its earnings to invest for future growth. In addition to that self-funded growth mechanism, the reasonable payout ratio gives Infinity flexibility to maintain its payment even if growth doesn't materialize as expected. The company's guidance for the year estimates earnings between $3.40 and $4.20 per share, which suggests its dividend should remain covered with the potential for future growth.
Balance sheet and valuation
- Balance sheet: A debt-to-equity ratio of roughly 0.5 indicates that the company uses debt hasn't overleveraged itself to the point where it could be derailed by a mere financial hiccup.
- Valuation: By a discounted cash-flow analysis that assumes the company starts facing some stiffer competition for its currently profitable user base, the company looks to be worth about $750 million. That makes its recent market cap around $730 million seem reasonable.
The other active holdings in the portfolio include:
- An industrial conglomerate
- A generic-pharmaceutical powerhouse
- A provider of staple foods
- An auto parts distributor
- A safety equipment provider
- A high-tech (software) titan
- A toy maker
- A shipping company
- A pipeline giant
- A drugstore
- A semiconductor superstar
- A two-for-one railroad special
- A fast-food juggernaut
- A medical device maker
- A supplemental insurance writer
- A defense contractor
- An industrial engineering and electrical equipment company
- A major bank
- A leading lawn care provider
Infinity Property & Casualty becomes the second insurance company active in the portfolio, joining Aflac (NYSE:AFL). The two play in largely different markets, with Aflac focused on both domestic supplemental insurance and insurance in Japan. Infinity Property & Casualty's primary business is domestic nonstandard auto insurance. While the companies are primarily insurers, their different markets indicate there is room for both in the portfolio, with its reasonable balancing-act diversification principles.
Why pick it over its peers?
Among the major auto-insurance companies, reliable dividend growth seems tough to come by. For a long time, Allstate (NYSE:ALL) had a decent track record of dividend growth, but it was forced to cut its payout in 2009. Progressive (NYSE:PGR) pays a variable dividend, which certainly helps its cash flow management but doesn't necessarily fit this portfolio's dividend-growth-oriented design.
On top of that, not all auto insurance companies are independently public. Auto insurance giant State Farm is a mutual insurance company, so its policyholders technically own the business. GEICO is a subsidiary of another company, which itself doesn't pay a dividend.
What are the risks?
Of course, no investment is without risk. There's probably a good reason why so few auto insurers have been able to reliably raise their dividends. In addition, Infinity Property & Casualty primarily serves "nonstandard" (read: higher-risk) clients. The company specifically focuses on urban and Hispanic customers in seven key states.
Strategically, that narrow focus does allow it to know its customers extremely well, and thus far it appears to have carved out a profitable niche serving that otherwise underserved segment of the population. That said, excess profits have a way of attracting competition, and if Infinity Property & Casualty continues to profitably grow by focusing on that segment, competition from the bigger players could get fierce, quickly.
The iPIG portfolio's valuation estimate assumes Infinity Property & Casualty will face stiffer competition than what would be priced in by analysts' current average projected growth rate of 9%. While it's not a guarantee against competitive risks, it does mean that the iPIG portfolio's estimate may appear conservative in hindsight if the company manages to grow as hoped over time.
What comes next?
Infinity Property & Casualty expects to announce its earnings on Thursday, before the market opens. The Fool's disclosure policy won't allow the iPIG portfolio to purchase Infinity Property & Casualty before that announcement, and earnings announcements can often move the market and alter valuation estimates.
As a result, the iPIG portfolio's current "buy below" target is $65, assuming this week's earnings announcement doesn't significantly change the investing thesis. If the thesis holds fairly steady, once the disclosure policy allows, I plan to buy approximately $2,000 worth of Infinity Property & Casualty's stock for the iPIG portfolio, so long as it remains below $65 a share. If the thesis changes significantly, or the stock skyrockets on the earnings announcement, watch my article feed for an update in lieu of an actual investment.
To follow the iPIG portfolio as buy and sell decisions are made, watch Chuck's article feed by clicking here. To join The Motley Fool's free discussion board dedicated to the iPIG portfolio, click here. To see the iPIG portfolio's online tracking spreadsheet, click here.
Chuck Saletta owns shares of Aflac and his wife owns shares of Infinity Property and Casualty. The Motley Fool recommends Aflac and Progressive. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.