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Buy This Stock Before It Becomes a Dividend Aristocrat

By Dave Kovaleski - Jun 28, 2021 at 8:55AM

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The company just raised its dividend for the 17th straight year.

For income investors, Dividend Aristocrats represent the best of the best. When a company has achieved that status, it means it has increased its dividend for at least 25 straight years. There are only 65 stocks on the market right now that can call themselves Dividend Aristocrats -- and all are great options for dividend investors. 

But if you are looking for a great dividend stock that is bubbling under the surface and on its way to becoming dividend royalty, those names are a little harder to find. One of them is Travelers (TRV 1.84%), one of the nationʻs largest insurance companies. Hereʻs why this is a stock that you might want to consider buying now, as it is well on its way to Dividend Aristocrat status.

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Travelers stock is up about 8% year to date

Travelers is one of the largest property and casualty insurers in the country. Its stock price is up about 8% year to date, reflective of a solid first quarter that saw revenue climb 2% year over year to $8.3 billion and net income jump 22% to $733 million.

Like many insurers, the company had record catastrophic losses for the first quarter, likely due to winter storms in the U.S. and the massive freeze event in Texas during the period. However, the overall earnings gains came from a higher underwriting gain due to an increase in earned and written premiums. Net investment income was also up 15% year over year due to strong performance of its investment portfolio.

The combined ratio, which measures profitability by calculating losses and expenses and dividing them by earned premiums, was 96.6%, up 1.1 percentage points year over year. The lower the combined ratio the better, and anything under 100% means the company is earning more than it is paying out. So the 96.6%, while up slightly, is still a pretty good number, especially after a quarter with higher catastrophic losses.

But the underlying combined ratio, which excludes prior-year reserve development and catastrophes and is a better gauge of underwriting profitability for the current year, was down 1.8 percentage points to 89.5%. 

17 years of dividend increases 

As one of the largest property and casualty insurers, Travelers has been a pretty steady performer over the years due to its sustained underwriting strength, which showed again this past quarter. That effectiveness has, in turn, allowed it to steadily increase its quarterly dividend.

Travelers currently has a streak of 17 straight years raising its quarterly dividend, including this year, when it bumped it up 4% to $0.88 per share. For the year, the company pays $3.52 per share. Over the last 10 years, Travelers has increased its dividend by an average of 9% per year.

Travelers pays out a solid yield of 2.26%, which is above the average on the S&P 500. That yield has been consistent over the past 10 years, hovering right around its current rate.

Travelers also has a manageable payout ratio of 30.6%, which means that 30.6% of its earnings go to the dividend. That is a healthy percentage that is sustainable, given Travelers' solid earnings history and the investments it has made in technology to lower expenses and improve efficiency over the years. Over the past 10 years through March 31, Travelers has seen earnings grow about 5% per year on an annualized basis.

Travelers made it through a very difficult year in good shape due to its expense management and strength as an underwriter. It puts the company in a good place in a growing economy, which will eventually lead to rising interest rates. Travelers is a solid value, trading at about 13 times earnings with a price-to-book ratio of just 1.32. It is not going to shoot the lights out, but if you are looking for income in your portfolio, it's not a bad choice.

Dave Kovaleski 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.

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The Travelers Companies, Inc. Stock Quote
The Travelers Companies, Inc.
TRV
$162.92 (1.84%) $2.94

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