Please ensure Javascript is enabled for purposes of website accessibility

Is Travelers Stock a Buy?

By Brent Nyitray, CFA – Apr 29, 2020 at 7:22AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This financials sector stock is reasonably safe, but COVID-19 risks are present and could have an impact.

The past couple of months have been miserable for the financials sector due to fallout from the coronavirus pandemic. Despite a favorable interest rate backdrop, stocks for companies in this sector have been crushed on recessionary fears. Real estate investment trusts (REITs) and banks have been hit particularly hard.

But what about property and casualty insurers? 

COVID-19 charges negatively impact first-quarter earnings

In its earnings report out last week, Travelers (TRV -0.22%) reported net income of $2.33 a share compared to $2.99 a share in the same quarter last year. Total net income of $600 million was negatively impacted by $68 million in after-tax charges related to the COVID-19 crisis. Travelers also hiked its dividend 4% to $0.85 a share. Net written premiums rose 4% to $7.3 billion as all lines of business contributed to the gain. 

A line of businessmen under a red umbrella defending against the COVID-19 virus.

Image source: Getty Images.

Travelers CEO Alan Schnitzer had this to say about the current environment: 

Although there are many uncertainties surrounding COVID-19's impact on our global economy and on us, it has been in the most challenging circumstances that the strength of our AA-rated franchise and the value we provide to all of our stakeholders shine through. Our balance sheet is extremely strong, our debt-to-capital ratio is comfortably within our target range, our holding company liquidity of $1.6 billion is well above our target level and we have a very high-quality investment portfolio. We have the talent, technology, risk management processes and procedures, and, importantly, financial strength to manage through these extraordinary times and to continue to deliver meaningful shareholder value over time."

As a property and casualty business, Travelers is GDP-sensitive. The company's business will ebb and flow with the general trend of the economy along with the preponderance of natural disasters in a given year. The COVID-19 pandemic is expected to cause some losses for the company, and the drop in interest rates will make it harder for the company to generate enough income in its investment portfolio to cover expected future losses. This is a problem for insurance companies across the board (much like it is for pension funds). At the end of the day, the actuarial tables couldn't care less that interest rates are zero. 

COVID-19 legislative and litigation risks 

In the auto insurance business, less traveling on the road is expected to reduce expected claims, although Travelers did rebate a certain percentage of premiums to customers in March and April. With regard to workers' compensation claims, having businesses shut helps control losses here as well, and the company's biggest exposure is with healthcare workers and first responders, who aren't a large part of Travelers' book. Some states are considering tweaking the presumption of compensability, which would make any COVID-19 cases a workers' compensation issue regardless if it happened in the course of employment. Since this will create a huge liability Travelers didn't count on, it is a risk the company will monitor closely. 

The other threat on the horizon will be a slew of COVID-19-related lawsuits, which the company discussed on its earnings conference call. While this risk is hard to estimate, it isn't zero. This has the potential to affect the company's expenses and liquidity, just as the company is dealing with spring tornadoes, summer wildfires, and then the hurricane season. 

Historically, Travelers is trading on the cheap side

In terms of valuation, Travelers' P/E ratio is on the low side of its historical average (see chart below). Currently, Travelers is trading at a P/E of 11 when it normally trades in a range of high single-digit P/Es to low 20s. 

TRV PE Ratio Chart

TRV PE Ratio data by YCharts

Final verdict

Travelers is a reasonably priced property and casualty insurer that has powerful brand recognition. The company trades with a dividend yield of 3.4%, which isn't bad in this current economic environment. While Travelers won't be the most exciting stock in an investor's portfolio, it is reasonably safe and should provide decent returns for the long haul, regardless of the immediate legal and legislative issues surrounding the COVID-19 pandemic. 

Brent Nyitray, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Travelers Companies Stock Quote
The Travelers Companies
TRV
$161.11 (-0.22%) $0.36

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
342%
 
S&P 500 Returns
110%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/05/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.